CHAPTER OBJECTIVES
CHAPTER 1
•
Explore conceptualizations of business
ethics from an organizational perspective
•
Examine the historical foundations and
evolution of business ethics
•
Provide evidence that ethical value
systems support business performance
•
Gain insight into the extent of ethical
misconduct in the workplace and the
pressures for unethical behavior
CHAPTER OUTLINE
Business Ethics Defined
Why Study Business Ethics?
A Crisis in Business Ethics
Specific Issues
The Reasons for Studying
Business Ethics
The Development of Business Ethics
Before 1960: Ethics in Business
The 1960s: The Rise of Social
Issues in Business
THE IMPORTANCE OF
BUSINESS ETHICS
The 1970s: Business Ethics
as an Emerging Field
The 1980s: Consolidation
The 1990s: Institutionalization
of Business Ethics
The Twenty-First Century
of Business Ethics
Developing an Organizational and Global
Ethical Culture
The Benefits of Business Ethics
Ethics Contributes to
Employee Commitment
Ethics Contributes to Investor Loyalty
Ethics Contributes to
Customer Satisfaction
Ethics Contributes to Profits
Our Framework for Studying Business
Ethics
© ZoranKrstic/Shutterstock.com
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AN ETHICAL DILEMMA*
Sophie just completed a sales training course with one of
the firm’s most productive sales representatives, Emma. At
the end of the first week, Sophie and Emma sat in a motel
room filling out their expense vouchers for the week. Sophie
casually remarked to Emma that the training course stressed
the importance of accurately filling out expense vouchers.
Emma replied, “I’m glad you brought that up, Sophie.
The company expense vouchers don’t list the categories
we need. I tried many times to explain to the accountants
that there are more expenses than they have boxes for. The
biggest complaint we, the salespeople, have is that there is
no place to enter expenses for tipping waitresses, waiters,
cab drivers, bell hops, airport baggage handlers, and the
like. Even the government assumes tipping and taxes them
as if they were getting an 18 percent tip. That’s how service
people actually survive on the lousy pay they get from their
bosses. I tell you, it is embarrassing not to tip. One time I
was at the airport and the skycap took my bags from me
so I didn’t have the hassle of checking them. He did all the
paper work and after he was through, I said thank you. He
looked at me in disbelief because he knew I was in sales. It
took me a week to get that bag back.”
“After that incident I went to the accounting
department, and every week for five months I told them
they needed to change the forms. I showed them the
approximate amount the average salesperson pays in tips
per week. Some of them were shocked at the amount. But
would they change it or at least talk to the supervisor? No! So
I went directly to him, and do you know what he said to me?”
“No, what?” asked Sophie.
“He told me that this is the way it has always been
done, and it would stay that way. He also told me if I tried to
go above him on this, I’d be looking for another job. I can’t
chance that now, especially in this economy. Then he had
the nerve to tell me that salespeople are paid too much,
and that’s why we could eat the added expenses. We’re the
only ones who actually generate revenue and he tells me
that I’m overpaid!”
“So what did you do?” inquired Sophie.
“I do what my supervisor told me years ago. I pad my
account each week. For me, I tip 20 percent, so I make
sure I write down when I tip and add that to my overall
expense report.”
“But that goes against company policy. Besides, how
do you do it?” asked Sophie.
“It’s easy. Every cab driver will give you blank receipts
for cab fares. I usually put the added expenses there. We
all do it,” said Emma. “As long as everyone cooperates,
the Vice President of Sales doesn’t question the expense
vouchers. I imagine she even did it when she was a lowly
salesperson.”
“What if people don’t go along with this arrangement?”
asked Sophie.
“In the past, we have had some who reported it like
corporate wants us to. I remember there was a person who
didn’t report the same amounts as the co-worker traveling
with her. Several months went by and the accountants
came in, and she and all the salespeople that traveled
together were investigated. After several months the
one who ratted out the others was fired or quit, I can’t
remember. I do know she never worked in our industry
again. Things like that get around. It’s a small world for
good salespeople, and everyone knows everyone.”
“What happened to the other salespeople who were
investigated?” Sophie asked.
“There were a lot of memos and even a 30-minute video
as to the proper way to record expenses. All of them had
conversations with the vice president, but no one was fired.”
“No one was fired even though it went against policy?”
Sophie asked Emma.
“At the time, my conversation with the VP went
basically this way. She told me that corporate was not going
to change the forms, and she acknowledged it was not
fair or equitable to the salespeople. She hated the head
accountant because he didn’t want to accept the reality of
a salesperson’s life in the field. That was it. I left the office
and as I walked past the Troll’s office—that’s what we call
the head accountant—he just smiled at me.”
This was Sophie’s first real job out of school and Emma
was her mentor. What should Sophie report on her expense
report?
QUESTIONS
| EXERCISES
1. Identify the issues Sophie has to resolve.
2. Discuss the alternatives for Sophie.
3. What should Sophie do if company policy appears to
conflict with the firm’s corporate culture?
*This
case is strictly hypothetical; any resemblance to real persons,
companies, or situations is coincidental.
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Chapter 1: The Importance of Business Ethics
3
T
he ability to anticipate and deal with business ethics issues and dilemmas has become
a significant priority in the twenty-first century. In recent years, a number of wellpublicized scandals resulted in public outrage about deception, fraud, and distrust in
business and a subsequent demand for improved business ethics, greater corporate responsibility, and laws to protect the financially innocent. The publicity and debate surrounding
highly publicized legal and ethical lapses at well-known firms highlight the need for businesses to integrate ethics and responsibility into all business decisions. On the other hand,
the majority of ethical businesses with no or few ethical lapses are rarely recognized in the
mass media for their conduct, mainly because good companies doing business the right
way do not generate media interest.
Highly visible business ethics issues influence the public’s attitudes toward business
and destroy trust. Ethically charged decisions are a part of everyday life for those who
work in organizations at all levels. Business ethics is not just an isolated personal issue;
codes, rules, and informal communications for responsible conduct are embedded in
an organization’s operations. This means ethical or unethical conduct is the province of
everyone who works in an organizational environment, from the lowest level employee to
the CEO.
Making good ethical decisions are just as important to business success as mastering management, marketing, finance, and accounting. While education and training
emphasize functional areas of business, business ethics is often viewed as easy to master,
something that happens with little effort. The exact opposite is the case. Decisions with
an ethical component are an everyday occurrence requiring people to identify issues and
make quick decisions. Ethical behavior requires understanding and identifying issues, areas
of risk, and approaches to making choices in an organizational environment. On the other
hand, people can act unethically simply by failing to identify a situation that has an ethical
issue. Ethical blindness results from individuals who fail to sense the nature and complexity of their decisions.1 Some approaches to business ethics look only at the philosophical
backgrounds of individuals and the social consequences of decisions. This approach fails
to address the complex organizational environment of businesses and pragmatic business
concerns. By contrast, our approach is managerial and incorporates real-world decisions
that impact the organization and stakeholders. Our book will help you better understand
how business ethics is practiced in the business world.
It is important to learn how to make decisions in the internal environment of an
organization to achieve personal and organizational goals. But business does not exist in
a vacuum. As stated, decisions in business have implications for investors, employees, customers, suppliers, and society. Ethical decisions must take these stakeholders into account,
for unethical conduct can negatively affect people, companies, industries, and society as
a whole. Our approach focuses on the practical consequences of decisions and on positive outcomes that have the potential to contribute to individuals, business, and society
at large. The field of business ethics deals with questions about whether specific conduct
and business practices are acceptable. For example, should a salesperson omit facts about a
product’s poor safety record in a sales presentation to a client? Should accountants report
inaccuracies they discover in an audit of a client, knowing the auditing company will probably be fired by the client for doing so? Should an automobile tire manufacturer intentionally conceal safety concerns to avoid a massive and costly tire recall? Regardless of their
legality, others will certainly judge the actions in such situations as right or wrong, ethical
or unethical. By its very nature, the field of business ethics is controversial, and there is no
universally accepted approach for resolving its dilemmas.
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4
Part 1: An Overview of Business Ethics
All organizations have to deal with misconduct. Even prestigious colleges such as Harvard and Dartmouth are not exempt. Students at Dartmouth were disciplined for cheating on their attendance and participation in an undergraduate ethics course. Because the
course used hand clickers registered to each student as a sign of attendance and participation, students who wanted to cut class would give their hand clickers to other classmates.2
Two administrators at the University of North Carolina at Chapel Hill oversaw courses
where the students—often athletes—did not have to show up. The courses included lectures that never met spanning back to the 1990s. 3
Before we get started, it is important to state our approach to business ethics.
First, we do not moralize by stating what is right or wrong in a specific situation, although
we offer background on normative guidelines for appropriate conduct. Second, although
we provide an overview of group and individual decision-making processes, we do not
prescribe one approach or process as the best or most ethical. However, we provide many
examples of successful ethical decision making. Third, by itself, this book will not make
you more ethical, nor will it give you equations on how to judge the ethical behavior of
others. Rather, its goal is to help you understand, use, and improve your current values
and convictions when making business decisions so you think about the effects of those
decisions on business and society. Our approach will help you understand what businesses are doing to improve their ethical conduct. To this end, we aim to help you learn
to recognize and resolve ethical issues within business organizations. As a manager, you
will be responsible for your decisions and the conduct of the employees you supervise.
For this reason, we provide a chapter on ethical leadership. The framework we developed
focuses on how organizational decisions are made and on ways companies can improve
their ethical conduct. This process is more complex than many think. People who believe
they know how to make the “right” decision usually come away with more uncertainty
about their own decision skills after learning about the complexity of ethical decision
making. This is a normal occurrence, and our approach will help you evaluate your own
values as well as those of others. It also helps you to understand the nature of business
ethics and incentives found in the workplace that change the way you make decisions in
business versus at home.
In this chapter, we first develop a definition of business ethics and discuss why it has
become an important topic in business education. We also discuss why studying business
ethics can be beneficial. Next, we examine the evolution of business ethics in North America. Then we explore the performance benefits of ethical decision making for businesses.
Finally, we provide a brief overview of the framework we use for examining business ethics
in this text.
BUSINESS ETHICS DEFINED
To understand business ethics, you must first recognize that most people do not have specific definitions they use to define ethics-related issues. The terms morals, principles, values, and ethics are often used interchangeably, and you will find this is true in companies
as well. Consequently, there is much confusion regarding this topic. To help you understand these differences, we discuss these terms.
For our purposes, morals refer to a person’s personal philosophies about what is right
or wrong. The important point is that when one speaks of morals, it is personal or singular.
Morals, your philosophies or sets of values of right and wrong, relate to you and you alone.
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Chapter 1: The Importance of Business Ethics
5
You may use your personal moral convictions in making ethical decisions in any context.
Business ethics comprises organizational principles, values, and norms that may originate
from individuals, organizational statements, or from the legal system that primarily guide
individual and group behavior in business. Principles are specific and pervasive boundaries for behavior that should not be violated. Principles often become the basis for rules.
Some examples of principles could include human rights, freedom of speech, and the
fundamentals of justice. Values are enduring beliefs and ideals that are socially enforced.
Several desirable or ethical values for business today are teamwork, trust, and integrity. Such
values are often based on organizational or industry best practices. Investors, employees,
customers, interest groups, the legal system, and the community often determine whether
a specific action or standard is ethical or unethical. Although these groups influence the
determination of what is ethical or unethical for business, they also can be at odds with one
another. Even though this is the reality of business and such groups may not necessarily be
right, their judgments influence society’s acceptance or rejection of business practices.
Ethics is defined as behavior or decisions made within a group’s values. In our case we
are discussing decisions made in business by groups of people that represent the business
organization. Because the Supreme Court defined companies as having limited individual
rights,4 it is logical such groups have an identity that includes core values. This is known as
being part of a corporate culture. Within this culture there are rules and regulations both
written and unwritten that determine what decisions employees consider right or wrong as
it relates to the firm. Such evaluations are judgments by the organization and are defined as
its ethics (or in this case their business ethics). One difference between an ordinary decision and an ethical one lies in “the point where the accepted rules no longer serve, and the
decision maker is faced with the responsibility for weighing values and reaching a judgment in a situation which is not quite the same as any he or she has faced before.”5 Another
difference relates to the amount of emphasis decision makers place on their own values
and accepted practices within their company. Consequently, values and judgments play a
critical role when we make ethical decisions.
Building on these definitions, we begin to develop a concept of business ethics. Most
people agree that businesses should hire individuals with sound moral principles. However, some special aspects must be considered when applying ethics to business. First, to
survive and contribute to society, businesses must earn a profit. There is no conflict or
trade-offs between profits and business ethics. For instance, Google, Texas Instruments,
and Starbucks are highly profitable companies that have earned a reputation for ethical conduct.6 Second, to be successful businesses must address the needs and desires of
stakeholders. The good news is the world’s most ethical companies often have superior
stock performance.7 To address these unique aspects of the business world, society has
developed rules—both legal and implicit—to guide businesses in their efforts to earn
profits in ways that help individuals or society and contribute to social and economic
well-being.
WHY STUDY BUSINESS ETHICS?
A Crisis in Business Ethics
Business ethics has become a major concern in business today. The Ethics Resource Center
conducts the National Business Ethics Survey (NBES) of more than 6,000 U.S. employees
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6
Part 1: An Overview of Business Ethics
FIGURE 1–1 Global Trust in Industry Sectors
78%
Technology
Automotive
71%
Food and Beverage
67%
Consumer Packaged Goods
66%
Telecommunications
63%
Pharmaceuticals
61%
Energy
60%
Financial Services
54%
Banks
53%
Media
51%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Source: Edelman, 2015 Edelman Trust Barometer, http://www.edelman.com/insights/intellectual-property/2015-edelman-trust-barometer/trust-andinnovation-edelman-trust-barometer/global-results/ (accessed January 30, 2015).
to gather reliable data on key ethics and compliance outcomes and to help identify and better understand the ethics issues that are important to employees. The NBES found that 41
percent of employees reported observing at least one type of misconduct. Approximately
63 percent reported the misconduct to management, an increase from previous years.8
Business ethics decisions and activities have come under greater scrutiny by many different
stakeholders, including consumers, employees, investors, government regulators, and special interest groups. For instance, regulators carefully examined risk controls at JP Morgan
Chase to investigate whether there were weaknesses in its system that allowed the firm to
incur billions of dollars in losses through high-risk trading activities. Regulators are placing financial institutions under greater scrutiny and holding them increasingly accountable. There has been a long conflict between U.S. regulators and Swiss banks regarding
whether these banks were being used to evade U.S. taxes. Credit Suisse pled guilty to helping Americans evade their taxes and was forced to pay a $2.6 billion fine.9 Figure 1–1
shows the percentage of global respondents who say they trust a variety of businesses in
various industries. Financial institutions and banks have some of the lowest ratings, indicating that the financial sector has not been able to restore its reputation since the most
recent recession. There is no doubt negative publicity associated with major misconduct
lowered the public’s trust in certain business sectors.10 Decreased trust leads to a reduction
in customer satisfaction and customer loyalty, which in turn can negatively impact the firm
or industry.11
Specific Issues
There are a number of ethical issues that must be addressed to prevent misconduct. Misuse of company resources, abusive behavior, harassment, accounting fraud, conflicts of
interest, defective products, bribery, product knockoffs, and employee theft are all problems cited as potential risk areas. Chinese e-commerce giant Alibaba, which trades on the
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Chapter 1: The Importance of Business Ethics
7
New York Stock Exchange, was reprimanded by Chinese government authorities for ignoring the sales of knockoff products through Taobao, its biggest e-commerce platform. They
also accused Alibaba employees of engaging in anticompetitive behavior such as bullying
merchants to stay away from rival sites. As China attempts to secure a more solid reputation in the business world, its government recognizes that it must take steps to eliminate organizational misconduct.12 Other ethical issues relate to recognizing the interests
of various stakeholders. For instance, residents of Swansboro, North Carolina attempted
to adopt an ordinance to prevent Walmart from opening a superstore in the area. The fear
is that smaller independent stores cannot compete when big-box retailers come to town.13
Although large companies like Walmart have significant power, pressures from the community still limit what they can do.
General ethics plays an important role in the public sector as well. In government,
several politicians and high-ranking officials have experienced significant negative publicity, and some resigned in disgrace over ethical indiscretions. Former New Orleans mayor
Ray Nagin was sentenced to 10 years in prison for misconduct during his tenure as mayor,
including bribery, money laundering, and conspiracy.14 Such political scandals demonstrate that political ethical behavior must be proactively practiced at all levels of public
service.
Every organization has the potential for unethical behavior. For instance, the U.S.
Defense Secretary ordered a renewed focus on military ethics after cheating scandals
occurred in different branches of the military. Air force officers at the Malmstrom Air
Force Base in Montana were suspended after it was discovered that there had been widespread cheating on monthly proficiency tests on operating warheads. Similarly, the U.S.
Navy was criticized when sailors were found to have cheated on qualification exams for
becoming nuclear reactor instructors. The Defense Secretary is concerned that the issue
might be systemic, requiring an ethics overhaul in the military.15
Even sports ethics can be subject to lapses. The National Football League was heavily criticized for initially giving Baltimore Ravens player Ray Rice a two-game suspension
after videos surfaced of him abusing his girlfriend. The scandal caused outrage among
consumers who felt the NFL did not take domestic abuse incidents seriously. The NFL
apologized and changed its policies on domestic abuse.16 This incident along with other
sports scandals has led to calls for greater accountability among sports players and coaches.
Whether they are made in the realm of business, politics, science, or sports, most decisions are judged either right or wrong, ethical or unethical. Regardless of what an individual believes about a particular action, if society judges it to be unethical or wrong, new
legislation usually follows. Whether correct or not, that judgment directly affects a company’s ability to achieve its business goals. You should be aware that the public is more
tolerant of questionable consumer practices than of similar business practices. Double
standards are at least partly due to differences in wealth and the success between businesses
and consumers. The more successful a company, the more the public is critical when misconduct occurs.17 For this reason alone, it is important to understand business ethics and
recognize ethical issues.
The Reasons for Studying Business Ethics
Studying business ethics is valuable for several reasons. Business ethics is more than an
extension of an individual’s own personal ethics. Many people believe if a company hires
good people with strong ethical values, then it will be a “good citizen” organization. But as
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8
Part 1: An Overview of Business Ethics
we show throughout this text, an individual’s personal moral values are only one factor
in the ethical decision-making process. True, moral values can be applied to a variety of
situations in life, and some people do not distinguish everyday ethical issues from business ones. Our concern, however, is with the application of principles, values, and standards in the business context. Many important issues are not related to a business context,
although they remain complex moral dilemmas in a person’s own life. For example,
although abortion and human cloning are moral issues, they are not an issue in most business organizations.
Professionals in any field, including business, must deal with individuals’ personal
moral dilemmas because such dilemmas affect everyone’s ability to function on the job.
Normally, a business does not dictate a person’s morals. Such policies would be illegal.
Only when a person’s morals influence his or her performance on the job does it involve a
dimension within business ethics.
Just being a good person and having sound personal values may not be sufficient
to handle the ethical issues that arise in a business organization. Although truthfulness,
honesty, fairness, and openness are often assumed to be self-evident and accepted, business-strategy decisions involve complex and detailed discussions. For example, there is
considerable debate over what constitutes antitrust, deceptive advertising, and violations
of the Foreign Corrupt Practices Act. A high level of personal moral development may
not prevent an individual from violating the law in a complicated organizational context
where even experienced lawyers debate the exact meaning of the law. For instance, the
National Labor Relations Board ruled that employees have the right to use company email
systems to discuss working conditions and unionization as long as it is not on company
time. Employer groups claim that employees have plenty of options for discussing these
topics and maintain that it will be hard to ensure employees are not using company computer servers for these purposes during work hours. The right of employees versus employers is a controversial topic that will continue to need clarification from the courts.18
Some approaches to business ethics assume ethics training is for people whose personal moral development is unacceptable, but that is not the case. Because organizations
are culturally diverse and personal morals must be respected, ensuring collective agreement on organizational ethics (that is, codes reasonably capable of preventing misconduct)
is as vital as any other effort an organization’s management may undertake.
Many people with limited business experience suddenly find themselves making decisions about product quality, advertising, pricing, sales techniques, hiring practices, and
pollution control. The morals they learned from family, religion, and school may not provide specific guidelines for these complex business decisions. In other words, a person’s
experiences and decisions at home, in school, and in the community may be quite different
from his or her experiences and decisions at work. Many business ethics decisions are close
calls. In addition, managerial responsibility and ethical leadership for the conduct of others
requires knowledge of ethics and compliance processes and systems. Years of experience in
a particular industry may be required to know what is acceptable. For example, when are
advertising claims more exaggeration than truth? When does such exaggeration become
unethical? Pet food manufacturer Blue Buffalo’s claims that its food contains no byproducts
and is superior to competitors’ did not set well with Purina. Purina filed a lawsuit against
Blue Buffalo claiming that an independent test detected byproducts in Blue Buffalo’s pet
food. Blue Buffalo denied the allegations. While misleading advertising violates the law,
puffery—or an exaggerated claim that customers should not take seriously—is considered
acceptable. In this case, Blue Buffalo’s claims are clearly not puffery, which is why Purina
challenged the company through a lawsuit.19
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Chapter 1: The Importance of Business Ethics
9
Studying business ethics will help you begin to identify ethical issues when they arise
and recognize the approaches available for resolving them. You will learn more about
the ethical decision-making process and about ways to promote ethical behavior within
your organization. By studying business ethics, you may also begin to understand how to
cope with conflicts between your own personal values and those of the organization in
which you work. As stated earlier, if after reading this book you feel a little more unsettled
about potential decisions in business, your decisions will be more ethical and you will have
knowledge within this area.
THE DEVELOPMENT OF
BUSINESS ETHICS
The study of business ethics in North America has evolved through five distinct stages—(1)
before 1960, (2) the 1960s, (3) the 1970s, (4) the 1980s, and (5) the 1990s—and continues
to evolve in the twenty-first century (see Table 1–1).
Before 1960: Ethics in Business
Prior to 1960, the United States endured several agonizing phases of questioning the
concept of capitalism. In the 1920s, the progressive movement attempted to provide citizens with a “living wage,” defined as income sufficient for education, recreation, health,
and retirement. Businesses were asked to check unwarranted price increases and any
other practices that would hurt a family’s living wage. In the 1930s came the New Deal
that specifically blamed business for the country’s economic woes. Business was asked to
work more closely with the government to raise family income. By the 1950s, the New
Deal evolved into President Harry S. Truman’s Fair Deal, a program that defined such matters as civil rights and environmental responsibility as ethical issues that businesses had to
address.
Until 1960, ethical issues related to business were often discussed within the domain
of theology or philosophy or in the realm of legal and competitive relationships. Religious
leaders raised questions about fair wages, labor practices, and the morality of capitalism.
For example, Catholic social ethics, expressed in a series of papal encyclicals, included
concern for morality in business, workers’ rights, and living wages; for humanistic values
rather than materialistic ones; and for improving the conditions of the poor. The Protestant work ethic encouraged individuals to be frugal, work hard, and attain success in the
capitalistic system. Such religious traditions provided a foundation for the future field of
business ethics.
The first book on business ethics was published in 1937 by Frank Chapman Sharp
and Philip G. Fox. The authors separated their book into four sections: fair service, fair
treatment of competitors, fair price, and moral progress in the business world. This early
textbook discusses ethical ideas based largely upon economic theories and moral philosophies. However, the section’s titles indicate the authors also take different stakeholders into
account. Most notably, competitors and customers are the main stakeholders emphasized,
but the text also identifies stockholders, employees, business partners such as suppliers,
and government agencies.20 Although the theory of stakeholder orientation would not
evolve for many more years, this earliest business ethics textbook demonstrates the necessity of the ethical treatment of different stakeholders.
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10
Part 1: An Overview of Business Ethics
TABLE 1–1 Timeline of Ethical and Socially Responsible Concerns
1960s
1970s
1980s
1990s
2000s
Environmental issues
Employee
militancy
Bribes and illegal
contracting
practices
Sweatshops and unsafe
working conditions in
third-world countries
Cybercrime
Civil rights issues
Human rights
issues
Influence peddling
Rising corporate
liability for personal
damages (for example,
cigarette companies)
Financial
misconduct
Increased employeeemployer tension
Covering up
rather than
correcting issues
Deceptive
advertising
Financial
mismanagement
and fraud
Global issues,
Chinese
product safety
Changing work ethic
Disadvantaged
consumers
Financial fraud (for
example, savings
and loan scandal)
Organizational ethical
misconduct
Sustainability
Rising drug use
Transparency
issues
Intellectual
property theft
Source: Adapted from “Business Ethics Timeline,” Ethics Resource Center, http://www.ethics.org/resource/business-ethics-timeline (accessed June 13, 2013).
The 1960s: The Rise of Social Issues in Business
During the 1960s American society witnessed the development of an anti-business trend
because many critics attacked the vested interests that controlled the economic and political aspects of society—the so-called military–industrial complex. The 1960s saw the decay
of inner cities and the growth of ecological problems such as pollution and the disposal of
toxic and nuclear wastes. This period also witnessed the rise of consumerism—activities
undertaken by independent individuals, groups, and organizations to protect their rights
as consumers. In 1962 President John F. Kennedy delivered a “Special Message on Protecting the Consumer Interest” that outlined four basic consumer rights: the right to safety,
the right to be informed, the right to choose, and the right to be heard. These came to be
known as the Consumers’ Bill of Rights.
The modern consumer movement is generally considered to have begun in 1965 with
the publication of Ralph Nader’s Unsafe at Any Speed that criticized the auto industry as a
whole, and General Motors Corporation (GM) in particular, for putting profit and style
ahead of lives and safety. GM’s Corvair was the main target of Nader’s criticism. His consumer protection organization, popularly known as Nader’s Raiders, fought successfully
for legislation requiring automobile makers to equip cars with safety belts, padded dashboards, stronger door latches, head restraints, shatterproof windshields, and collapsible
steering columns. Consumer activists also helped secure passage of consumer protection
laws such as the Wholesome Meat Act of 1967, the Radiation Control for Health and Safety
Act of 1968, the Clean Water Act of 1972, and the Toxic Substance Act of 1976.21
After Kennedy came President Lyndon B. Johnson and the “Great Society,” a series of
programs that extended national capitalism and told the business community the U.S. government’s responsibility was to provide all citizens with some degree of economic stability,
equality, and social justice. Activities that could destabilize the economy or discriminate
against any class of citizens began to be viewed as politically unethical and unlawful.
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Chapter 1: The Importance of Business Ethics
11
The 1970s: Business Ethics as an Emerging Field
Business ethics began to develop as a field of study in the 1970s. Theologians and philosophers laid the groundwork by suggesting certain moral principles could be applied
to business activities. Using this foundation, business professors began to teach and write
about corporate social responsibility, an organization’s obligation to maximize its positive
impact on stakeholders and minimize its negative impact. Philosophers increased their
involvement, applying ethical theory and philosophical analysis to structure the discipline of business ethics. Companies became more concerned with their public image, and
as social demands grew, many businesses realized they needed to address ethical issues
more directly. The Nixon administration’s Watergate scandal focused public interest on the
importance of ethics in government. Conferences were held to discuss the social responsibilities and ethical issues of business. Centers dealing with issues of business ethics were
established. Interdisciplinary meetings brought together business professors, theologians,
philosophers, and businesspeople. President Jimmy Carter attempted to focus on personal
and administrative efforts to uphold ethical principles in government. The Foreign Corrupt
Practices Act was passed during his administration, making it illegal for U.S. businesses to
bribe government officials of other countries. Today this law is the highest priority of the
U.S. Department of Justice.
By the end of the 1970s, a number of major ethical issues had emerged, including
bribery, deceptive advertising, price collusion, product safety, and ecology. Business ethics
became a common expression. Academic researchers sought to identify ethical issues and
describe how businesspeople might choose to act in particular situations. However, only
limited efforts were made to describe how the ethical decision-making process worked and
to identify the many variables that influence this process in organizations.
The 1980s: Consolidation
In the 1980s, business academics and practitioners acknowledged business ethics as a field
of study, and a growing and varied group of institutions with diverse interests promoted
it. Centers for business ethics provided publications, courses, conferences, and seminars.
R. Edward Freeman was among the first scholars to pioneer the concept of stakeholders as
a foundational theory for business ethics decisions. Freeman defined stakeholders as “any
group or individual who can affect or is affected by the achievement of the organization’s
objectives.”22 Freeman’s defense of stakeholder theory had a major impact on strategic
management and corporations’ views of their responsibilities. Business ethics were also a
prominent concern within leading companies such as General Electric, Hershey Foods,
General Motors, IBM, Caterpillar, and S. C. Johnson & Son, Inc. Many of these firms established ethics and social policy committees to address ethical issues.
In the 1980s, the Defense Industry Initiative on Business Ethics and Conduct (DII) was
developed to guide corporate support for ethical conduct. In 1986 eighteen defense contractors drafted principles for guiding business ethics and conduct.23 The organization has
since grown to nearly fifty members. This effort established a method for discussing best
practices and working tactics to link organizational practice and policy to successful ethical compliance. The DII includes six principles. First, the DII supports codes of conduct
and their widespread distribution. These codes of conduct must be understandable and
cover their more substantive areas in detail. Second, member companies are expected to
provide ethics training for their employees as well as continuous support between training
periods. Third, defense contractors must create an open atmosphere in which employees
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12
Part 1: An Overview of Business Ethics
feel comfortable reporting violations without fear of retribution. Fourth, companies need
to perform extensive internal audits and develop effective internal reporting and voluntary
disclosure plans. Fifth, the DII insists that member companies preserve the integrity of
the defense industry. And sixth, member companies must adopt a philosophy of public
accountability.24
The 1980s ushered in the Reagan–Bush era, with the accompanying belief that selfregulation, rather than regulation by government, was in the public’s interest. Many tariffs
and trade barriers were lifted and businesses merged and divested within an increasingly
global atmosphere. Thus, while business schools were offering courses in business ethics, the rules of business were changing at a phenomenal rate because of less regulation.
Corporations that once were nationally based began operating internationally and found
themselves mired in value structures where accepted rules of business behavior no longer
applied.
The 1990s: Institutionalization of Business Ethics
The administration of President Bill Clinton continued to support self-regulation and
free trade. However, it also took unprecedented government action to deal with healthrelated social issues such as teenage smoking. Its proposals included restricting cigarette
advertising, banning cigarette vending machine sales, and ending the use of cigarette logos
in connection with sports events.25 Clinton also appointed Arthur Levitt as chairman of
the Securities and Exchange Commission in 1993. Levitt unsuccessfully pushed for many
reforms that, if passed, could have prevented the accounting scandals exemplified by Enron
and WorldCom in the early twenty-first century.26
Federal Sentencing Guidelines for Organizations (FSGO), approved by Congress in
November 1991, set the tone for organizational ethical compliance programs in the 1990s.
The guidelines, which were based on the six principles of the DII,27 broke new ground by
codifying into law incentives to reward organizations for taking action to prevent misconduct, such as developing effective internal legal and ethical compliance programs.28 Provisions in the guidelines mitigate penalties for businesses striving to root out misconduct
and establish high ethical and legal standards.29 On the other hand, under FSGO, if a company lacks an effective ethical compliance program and its employees violate the law, it can
incur severe penalties. The guidelines focus on firms taking action to prevent and detect
business misconduct in cooperation with government regulation. At the heart of the FSGO
is the carrot-and-stick approach—that is, by taking preventive action against misconduct,
a company may avoid onerous penalties should a violation occur. A mechanical approach
using legalistic logic will not suffice to avert serious penalties. The company must develop
corporate values, enforce its own code of ethics, and strive to prevent misconduct. The law
develops new amendments almost every year. We will provide more detail on the FSGO’s
role in business ethics programs in Chapters 4 and 8.
The Twenty-First Century of Business Ethics
Although business ethics appeared to become more institutionalized in the 1990s, new
evidence emerged in the early 2000s that not all business executives and managers had
fully embraced the public’s desire for high ethical standards. After George W. Bush became
President in 2001, highly publicized corporate misconduct at Enron, WorldCom, Halliburton, and the accounting firm Arthur Andersen caused the government and the public to look for new ways to encourage ethical behavior.30 Accounting scandals, especially
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Chapter 1: The Importance of Business Ethics
13
falsifying financial reports, became part of the culture of many companies. Firms outside
the United States, such as Royal Ahold in the Netherlands and Parmalat in Italy, became
major examples of global accounting fraud. Although the Bush administration tried to
minimize government regulation, there appeared to be no alternative to developing more
regulatory oversight of business.
Such abuses increased public and political demands to improve ethical standards in
business. To address the loss of confidence in financial reporting and corporate ethics, in
2002 Congress passed the Sarbanes–Oxley Act, the most far-reaching change in organizational control and accounting regulations since the Securities and Exchange Act of 1934.
The new law made securities fraud a criminal offense and stiffened penalties for corporate
fraud. It also created an accounting oversight board that requires corporations to establish codes of ethics for financial reporting and to develop greater transparency in financial
reports to investors and other interested parties. Additionally, the law requires top executives to sign off on their firms’ financial reports, and risk fines and long prison sentences
if they misrepresent their companies’ financial positions. The legislation further requires
company executives to disclose stock sales immediately and prohibits companies from giving loans to top managers.31
Amendments to the FSGO require that a business’s governing authority be well
informed about its ethics program with respect to content, implementation, and effectiveness. This places the responsibility squarely on the shoulders of the firm’s leadership,
usually the board of directors. The board is required to provide resources to oversee the
discovery of risks and to design, implement, and modify approaches to deal with those
risks.
The Sarbanes–Oxley Act and the FSGO institutionalized the need to discover and
address ethical and legal risk. Top management and the board of directors of a corporation
are accountable for discovering risk associated with ethical conduct. Such specific industries as the public sector, energy and chemicals, health care, insurance, and retail have to
discover the unique risks associated with their operations and develop ethics programs to
prevent ethical misconduct before it creates a crisis. Most firms are developing formal and
informal mechanisms that affect interactive communication and transparency about issues
associated with the risk of misconduct. Business leaders should consider the greatest danger to their organizations lies in not discovering any serious misconduct or illegal activities
that may be lurking. Unfortunately, most managers do not view the risk of an ethical disaster as being as important as the risk associated with fires, natural disasters, or technology
failure. In fact, ethical disasters can be significantly more damaging to a company’s reputation than risks managed through insurance and other methods. The great investor Warren
Buffett stated it is impossible to eradicate all wrongdoing in a large organization and one
can only hope the misconduct is small and is caught in time. Buffett’s fears were realized
in 2008 when the financial system almost collapsed because of pervasive, systemic use of
instruments such as credit default swaps, risky debt such as subprime lending, and corruption in major corporations.
In 2009 Barack Obama became president in the middle of a great recession caused by
a meltdown in the global financial industry. Many firms, such as AIG, Lehman Brothers,
Merrill Lynch, and Countrywide Financial, engaged in ethical misconduct in developing
and selling high-risk financial products. President Obama led the passage of legislation
to provide a stimulus for recovery. His legislation to improve health care and provide
more protection for consumers focused on social concerns. Congress passed legislation
regarding credit card accountability, improper payments related to federal agencies, fraud
and waste, and food safety. The Dodd–Frank Wall Street Reform and Consumer Protection Act
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14
Part 1: An Overview of Business Ethics
addressed some of the issues related to the financial crisis and recession. The Dodd–Frank
Act was the most sweeping financial legislation since the Sarbanes–Oxley Act and possibly
since laws put into effect during the Great Depression. It was designed to make the financial services industry more ethical and responsible. This complex law required regulators
to create hundreds of rules to promote financial stability, improve accountability and transparency, and protect consumers from abusive financial practices.
The basic assumptions of capitalism have been questioned as countries around the
world work to stabilize markets and question those who manage the finances of individual
corporations and nonprofits. The financial crisis caused many people to question government institutions that provide oversight and regulation. As societies work to create change
for the better, they must address issues related to law, ethics, and the required level of compliance necessary for government and business to serve the public interest. Not since the
Great Depression and President Franklin Delano Roosevelt has the United States seen such
widespread government intervention and regulation—something most deem necessary,
but is nevertheless worrisome to free market capitalists.
Future ethical issues revolve around the acquisition and sales of information.
Cloud computing has begun a new paradigm. Businesses must no longer develop strategies
based on past practices; they begin with petabytes of information and look for relationships and correlations to discover the new rules of business. Big data deal with massive
data files obtained from structured and unstructured databases.32 What once was thought
of as intrusive is now accepted and promoted. Only recently have people begun to ask
whether the information collected by business is acceptable. Companies are becoming
more sophisticated in understanding their customers by the use of predictive analytic
technologies. Such technologies as well as advances in consumer behavior research have
reduced the consumer’s probability to choose independently. Businesses now know how to
better manipulate at an elemental level.
Is it acceptable for a business to review your Facebook or other social networking services? When shopping, does the fact that Q codes and microchips give your information
to businesses regarding where you are, what you are looking at, and what you have done in
the last day (via cell phone tower triangulation) bother you? Should your non-professional
life be subject to the ethics of the corporation when you are not at work? Finally, are you a
citizen first and then an employee or an employee first and then a citizen? These are some
of the business ethics issues in your future.
DEVELOPING AN ORGANIZATIONAL
AND GLOBAL ETHICAL CULTURE
Compliance and ethics initiatives in organizations are designed to establish appropriate
conduct and core values. A national survey of corporate legal officers found that 96 percent
said ethics and compliance are important in preventing illegal conduct. The ethical component of a corporate culture relates to the values, beliefs, and established and enforced
patterns of conduct employees use to identify and respond to ethical issues. In our book
the term ethical culture is acceptable behavior as defined by the company and industry. Ethical culture is the component of corporate culture that captures the values and norms an
organization defines and is compared to by its industry as appropriate conduct. The goal
of an ethical culture is to minimize the need for enforced compliance of rules and maximize the use of principles that contribute to ethical reasoning in difficult or new situations.
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Chapter 1: The Importance of Business Ethics
15
Ethical culture is positively related to workplace confrontation over ethics issues, reports
to management of observed misconduct, and the presence of ethics hotlines. 33 To develop
better ethical corporate cultures, many businesses communicate core values to their
employees by creating ethics programs and appointing ethics officers to oversee them. An
ethical culture creates shared values and support for ethical decisions and is driven by the
ethical leadership of top management.
On the other hand, corrupt organizational cultures support unethical behavior. These
cultures have been identified as creating negative values and norms such as “the ends justify the means.” In these cultures, ethical employees may be punished for failure to engage
in unethical activities.34 Regulators want firms to focus on their culture to avoid excessive
risk taking and unethical behavior. There is a fundamental belief that an ethical culture will
lead to good behavior.35
Globally, businesses are working closely together to establish standards of acceptable
behavior. We are already seeing collaborative efforts by a range of organizations to establish goals and mandate minimum levels of ethical behavior, from the European Union, the
North American Free Trade Agreement (NAFTA), the Southern Common Market (MERCOSUR), and the World Trade Organization (WTO) to, more recently, the Council on
Economic Priorities’ Social Accountability 8000 (SA 8000), the Ethical Trading Initiative,
the U.S. Apparel Industry Partnership, and ISO 19600. ISO 19600 is a global compliance
management standard that addresses risks, legal requirements, and stakeholder needs.
Companies that choose to abide by ISO 19600 can use these standards to improve their
approaches to compliance management, which can reassure stakeholders of their commitment toward ethics and compliance.36 Some companies refuse to do business with organizations that do not support and abide by these standards. Many companies demonstrate
their commitment toward acceptable conduct by adopting globally recognized principles
emphasizing human rights and social responsibility. For instance, in 2000 the United
Nations launched the Global Compact, a set of ten principles concerning human rights,
labor, the environment, and anti-corruption. The purpose of the Global Compact is to create openness and alignment among business, government, society, labor, and the United
Nations. Companies that adopt this code agree to integrate the ten principles into their
business practices, publish their progress toward these objectives on an annual basis, and
partner with others to advance broader objectives of the UN. 37 These ten principles are
covered in more detail in Chapter 10.
THE BENEFITS OF BUSINESS
ETHICS
The field of business ethics continues to change rapidly as more firms recognize the benefits of improving ethical conduct and the link between business ethics and financial performance. Both research and examples from the business world demonstrate that building
an ethical reputation among employees, customers, and the general public pays off. Figure
1–2 provides an overview of the relationship between business ethics and organizational
performance. Although we believe there are many practical benefits to being ethical,
many businesspeople make decisions because they believe a particular course of action is
simply the right thing to do as responsible members of society. NiSource, a distributor of
natural gas, electricity, and water in the Midwest and Northeast United States, has earned
a place in Ethisphere’s “World’s Most Ethical Companies” for three consecutive years.
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16
Part 1: An Overview of Business Ethics
FIGURE 1–2 The Role of Organizational Ethics in Performance
Employee
Commitment
and Trust
Investor
Loyalty
and Trust
Profits
Customer
Satisfaction
and Trust
© Cengage Learning
Ethical
Culture
NiSource has adopted a strong code of business conduct that stresses how employees are
all responsible for ethical conduct in the company. NiSource has four values—fairness,
honesty, integrity, and trust—that it puts into action in what it calls the NiSource Way.
It makes sure that every organization in its portfolio of businesses abides by these values,
which has placed it among the Fortune 500.38 Among the rewards for being more ethical
and socially responsible in business are increased efficiency in daily operations, greater
employee commitment, increased investor willingness to entrust funds, improved customer trust and satisfaction, and better financial performance. The reputation of a company has a major effect on its relationships with employees, investors, customers, and
many other parties.
Ethics Contributes to Employee Commitment
Employee commitment comes from workers who believe their future is tied to that of the
organization and from a willingness to make personal sacrifices for the organization.39 The
more a company is dedicated to taking care of its employees, the more likely the employees
will take care of the organization. Issues that foster the development of an ethical culture
for employees include the absence of abusive behavior, a safe work environment, competitive salaries, and the fulfillment of all contractual obligations toward employees. An ethics and compliance program can support values and appropriate conduct. Social programs
improving the ethical culture range from work–family programs to stock ownership plans
to community service. Home Depot associates, for example, participate in disaster-relief
efforts after hurricanes and tornadoes, rebuilding roofs, repairing water damage, planting
trees, and clearing roads in their communities. Because employees spend a considerable
number of their waking hours at work, a commitment by an organization to goodwill and
respect for its employees usually increases the employees’ loyalty to the organization and
their support of its objectives. The consulting and engineering firm Burns & McDonnell
has been nominated as one of Fortune Magazine’s “Best Companies to Work For” because
of the way it values its employees. The company is completely employee-owned with
what many consider to be the best company stock ownership plan in the United States.
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Chapter 1: The Importance of Business Ethics
17
It also offers workers a variety of unique benefits, including onsite health and fitness centers and charging stations for electric vehicles.40
Employees’ perceptions that their firm has an ethical culture lead to performanceenhancing outcomes within the organization.41 A corporate culture that integrates strong
ethical values and positive business practices has been found to increase group creativity
and job satisfaction and decrease turnover.42 For the sake of both productivity and teamwork, it is essential employees both within and among departments throughout an organization share a common vision of trust. The influence of higher levels of trust is greatest on
relationships within departments or work groups, but trust is a significant factor in relationships among departments as well. Programs that create a trustworthy work environment make individuals more willing to rely and act on the decisions of their coworkers. In
such a work environment, employees can reasonably expect to be treated with full respect
and consideration by their coworkers and superiors. Trusting relationships between upper
management and managers and their subordinates contribute to greater decision-making
efficiencies. One survey found that when employees see values such as honesty, respect,
and trust applied frequently in the workplace, they feel less pressure to compromise ethical
standards, observe less misconduct, are more satisfied with their organizations overall, and
feel more valued as employees.43
The ethical culture of a company matters to employees. According to a report on
employee loyalty and work practices, companies viewed as highly ethical by their employees were six times more likely to keep their workers. 44 Also, employees who view their
company as having a strong community involvement feel more loyal to their employers
and positive about themselves.
Ethics Contributes to Investor Loyalty
Ethical conduct results in shareholder loyalty and contributes to success that supports even
broader social causes and concerns. Investors today are increasingly concerned about the
ethics and social responsibility that creates the reputation of companies in which they invest,
and various socially responsible mutual funds and asset management firms help investors
purchase stock in ethical companies. Investors also recognize that an ethical culture provides a foundation for efficiency, productivity, and profits. Investors know, too, that negative
publicity, lawsuits, and fines can lower stock prices, diminish customer loyalty, and threaten
a company’s long-term viability. Many companies accused of misconduct experienced dramatic declines in the value of their stock when concerned investors divested. Warren Buffett
and his company Berkshire Hathaway command significant respect from investors because
of their track record of financial returns and the integrity of their organizations. Buffett says,
“I want employees to ask themselves whether they are willing to have any contemplated act
appear the next day on the front page of their local paper—to be read by their spouses, children and friends—with the reporting done by an informed and critical reporter.”
The demand for socially responsible investing is increasing. It is estimated that socially
responsible investments in the United States have funds valued at more than $6 trillion.
Social investing is becoming increasingly important to millennials born between 1980 and
2000, who view socially responsible behavior as more of a requirement than an option for
companies.45 Investors look at the bottom line for profits or the potential for increased
stock prices or dividends, but they also look for any potential flaws in the company’s performance, conduct, and financial reports. Therefore, gaining investors’ trust and confidence is vital to sustaining the financial stability of the firm.
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18
Part 1: An Overview of Business Ethics
DEBATE ISSUE
Ethics Contributes to Customer Satisfaction
It is generally accepted that customer satisfaction is one of
the most important factors in a successful business strategy.
Although a company continues to develop and adapt prodDoes Being Ethical Result in Better Performance?
ucts to keep pace with customers’ changing desires and preferences, it must also develop long-term relationships with its
While research suggests ethical businesses have
customers and stakeholders. As mentioned earlier, high levbetter performance, there is also an alternate
els of perceived corporate misconduct decreases customer
view. Many businesspeople think ethics and
trust.46 On the other hand, companies viewed as socially
social responsibility require resources that do
responsible increase customer trust and satisfaction. Southnot contribute to profits, and time spent in ethics
west Airlines has a reputation for its customer service and
training could be better used for other business
friendliness. When Southwest Airlines experienced probactivities. One viewpoint is that when companies
lems with on-time performance due to operational changes,
push the edge, pay minor fines for misconduct,
the company’s senior vice president of communications sent
or are not caught in wrongdoing, they may end
letters to the company’s most loyal customers explaining
up being more profitable than companies with a
the situation and assuring them the airline was committed
strong ethical culture. Many financial companies
toward maintaining their loyalty. As a result of its strong
became extremely profitable when taking high-risk
customer focus, the company has been profitable for the
opportunities with limited transparency about the
past 40 years when most airlines have struggled.47
nature of the complex products they sold. To gain
For most businesses, both repeat purchases and an
competitive advantage, a firm needs to be able
enduring relationship of mutual respect and cooperation
to reach markets and make sales. If a firm is too
with customers are essential for success. By focusing on
ethical, it might lose competitive advantages. On
customer satisfaction, a company continually deepens the
the other hand, Ethisphere’s World’s Most Ethical
customer’s dependence on the company, and as the customCompanies index indicates ethical companies have
er’s confidence grows, the firm gains a better understanding
better financial performance.
of how to serve the customer so the relationship may endure.
1. Ethical businesses are the most profitable.
Successful businesses provide an opportunity for customer
2. The most ethical businesses are not the most
feedback that engages the customer in cooperative problem
profitable.
solving. As is often pointed out, a happy customer will come
back, but disgruntled customers will tell others about their
dissatisfaction with a company and discourage friends from dealing with it.
Trust is essential to a good long-term relationship between a business and consumers.
The perceived ethicality of a firm is positively related to brand trust, emotional identification with the brand, and brand loyalty.48 A Nielsen survey revealed 55 percent of global
consumer respondents stated they would pay more for products from companies that give
back to society in a socially responsible and sustainable manner.49 As social responsibility
becomes more important for companies, corporate social responsibility may be viewed as
a sign of good management and may, according to one study, indicate good financial performance. However, another study indicates the reverse may be true, and companies who
have good financial performance are able to spend more money on social responsibility.50
As a highly successful company, Adobe invests heavily in community development and
sustainability. It invests 1 percent of its pretax profits in the Adobe Foundation, which partners with teams of employees to use the funds to improve local communities. The company donates software to more than 15,000 nonprofits. It has also made significant strides
in energy conservation, waste reduction, and green building, earning the company a spot
on Newsweek’s list of the world’s greenest companies.51
When an organization has a strong ethical environment, it usually focuses on the core
value of placing customers’ interests first. However, putting customers first does not mean
TAKE A STAND
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Chapter 1: The Importance of Business Ethics
19
the interests of employees, investors, and local communities should be ignored. An ethical
culture that focuses on customers incorporates the interests of all employees, suppliers, and
other interested parties in decisions and actions. Employees working in an ethical environment support and contribute to the process of understanding customers’ demands and
concerns.
Ethics Contributes to Profits
A company cannot nurture and develop an ethical culture unless it has achieved adequate
financial performance in terms of profits. Businesses with greater resources—regardless
of their staff size—have the means to be ethical and practice social responsibility while
serving their customers, valuing their employees, and contributing to society. Ethical conduct toward customers builds a strong competitive position shown to positively affect business performance and product innovation.52 Some dimensions of ethical culture have been
found to create innovativeness that is directly related to performance. Intuit adopted a
strong customer focus with a goal to make software that customers could easily use. Strong
customer initiatives help Intuit receive the feedback needed to release innovative products customers desire, including its flagship product TurboTax. As a result of its customer
focus, Intuit has become a leading company in the personal and small business software
industry.53 Despite this example of a positive company, it seems like every day business
newspapers and magazines offer new examples of the consequences of business misconduct. It is worth noting, however, that most of these companies learned from their mistakes
and recovered after they implemented programs to improve ethical and legal conduct.
Ample evidence shows being ethical pays off with better performance. Even the cost
of equity and financing for firms that are socially responsible is less than for firms that do
not engage stakeholders.54 Investors see more risk in firms without an ethical culture. As
indicated earlier, companies perceived by their employees as having a high degree of honesty and integrity have a much higher average total return to shareholders than do companies perceived as having a low degree of honesty and integrity.55 The World’s Most Ethical
Companies index was developed through methodology designed by a committee of leading attorneys, professors, and organization leaders. The companies in this index performed
as well as—and often better than—companies on the Standard & Poor’s 500 index over
5- and 10-year periods.56 These results provide strong evidence that corporate concern for
ethical conduct is becoming a part of strategic planning toward obtaining the outcome of
higher profitability. Rather than being just a function of compliance, ethics is becoming an
integral part of management’s efforts to achieve competitive advantage.
OUR FRAMEWORK FOR
STUDYING BUSINESS ETHICS
We developed a framework for this text to help you understand how people make ethical
decisions and deal with ethical issues. Table 1–2 summarizes each element in the framework and describes where each topic is discussed in this book.
In Part One, we provide an overview of business ethics. This chapter defines the term
business ethics and explores the development and importance of this critical business area.
In Chapter 2, we explore the role of various stakeholder groups in social responsibility and
corporate governance.
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20
Part 1: An Overview of Business Ethics
Part Two focuses on ethical issues and the institutionalization of business ethics. In
Chapter 3, we examine business issues that lead to ethical decision making in organizations. In Chapter 4, we look at the institutionalization of business ethics, including both
mandatory and voluntary societal concerns.
TABLE 1–2 Our Framework for Studying Business Ethics
Chapter
Highlights
1. The Importance of Business Ethics
• Definitions
• Reasons for studying business ethics
• History
• Benefits of business ethics
2. Stakeholder Relationships, Social Responsibility, and
Corporate Governance
• Stakeholder relationships
• Stakeholder influences in social responsibility
• Corporate governance
3. Emerging Business Ethics Issues
• Recognizing an ethical issue
• Honesty, fairness, and integrity
• Ethical issues and dilemmas in business: abusive and
disruptive behavior, lying, conflicts of interest, bribery,
corporate intelligence, discrimination, sexual harassment,
environmental issues, fraud, insider trading, intellectual
property rights, and privacy
• Determining an ethical issue in business
4. The Institutionalization of Business Ethics
• Mandatory requirements
• Voluntary requirements
• Core practices
• Federal Sentencing Guidelines for Organizations
• Sarbanes–Oxley Act
5. Ethical Decision Making
• Ethical issue intensity
• Individual factors in decision making
• Organizational factors in decision making
• Opportunity in decision making
• Business ethics evaluations and intentions
• Normative considerations in ethical decision making
• Role of institutions in normative decision making
• Importance of principles and core values to ethical
decision making
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21
Chapter 1: The Importance of Business Ethics
6. Individual Factors: Moral Philosophies and Values
• Moral philosophies, including teleological development
philosophies and cognitive moral deontological, relativist,
virtue ethics, and justice philosophies
• Stages of cognitive moral development
7. Organizational Factors: The Role of Ethical Culture and
Relationships
• Corporate culture
• Interpersonal relationships
• Whistle-blowing
• Opportunity and conflict
8. Developing an Effective Ethics Program
• Ethics programs
• Codes of ethics
• Program responsibility
• Communication of ethical standards
• Systems to monitor and enforce ethical standards
• Continuous improvement of ethics programs
9. Implementing and Auditing Ethics Programs
• Implementation programs
• Ethics audits
10. Business Ethics in a Global Economy
• Global culture and cultural relations
• Economic foundations of business ethics
• Multinational corporations
• Global cooperation
• Global ethics issues
11. Ethical Leadership
• Requirements for ethical leadership
• Managing ethical conflicts
• Ethical leadership communication
• Leader-follower relationships
• Sustainability and ethical decision making
• Global environmental issues
• Business response to sustainability issues
• Strategic implementation of environmental responsibility
© Cengage Learning
12. Sustainability: Ethical and Social Responsibility
Dimensions
In Part Three, we delineate the ethical decision-making process and then look at
both individual factors and organizational factors that influence decisions. Chapter 5
describes the ethical decision-making process from an organizational perspective. Chapter
6 explores individual factors that may influence ethical decisions in business, including
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
22
Part 1: An Overview of Business Ethics
moral philosophies and cognitive moral development. Chapter 7 focuses on organizational
dimensions including corporate culture, relationships, and conflicts.
In Part Four, we explore systems and processes associated with implementing business
ethics into global strategic planning. Chapter 8 discusses the development of an effective
ethics program. In Chapter 9, we examine issues related to implementing and auditing
ethics programs. Chapter 10 considers ethical issues in a global context. Chapter 11 examines ethical leadership and its importance in creating an ethical corporate culture. Finally,
Chapter 12 discusses the ethical and social responsibility considerations of sustainability.
We hope that this framework helps you develop a balanced understanding of the various perspectives and alternatives available to you when making ethical business decisions.
Regardless of your own personal values, the more you know about how individuals make
decisions, the better prepared you will be to cope with difficult ethical decisions. Such
knowledge will help you improve and control the ethical decision-making environment in
which you work.
It is your job to make the final decision in business situations that affect you. Sometimes that decision may be ethical; sometimes it may be unethical. It is always easy to look
back with hindsight and know what you should have done in a particular situation. At the
time, however, the choices might not have seemed so clear. To give you practice making
ethical decisions, Part Five of this book contains a number of cases. In addition, each chapter begins with a vignette, “An Ethical Dilemma,” and ends with a mini-case, “Resolving
Ethical Business Challenges,” that involves ethical problems. We hope these give you a better sense of the challenges of making ethical decisions in the business world.
SUMMARY
This chapter provided an overview of the field of business ethics and introduced the framework for the discussion of this subject. Business ethics comprises organizational principles,
values, and norms that may originate from individuals, organizational statements, or from
the legal system that primarily guide individual and group behavior in business. Investors,
employees, customers, special interest groups, the legal system, and the community often
determine whether a specific action is right or wrong, ethical or unethical.
Studying business ethics is important for many reasons. Recent incidents of unethical
activity in business underscore the widespread need for a better understanding of the factors that contribute to ethical and unethical decisions. Individuals’ personal moral philosophies and decision-making experience may not be sufficient to guide them in the business
world. Studying business ethics helps you begin to identify ethical issues and recognize the
approaches available to resolve them.
The study of business ethics evolved through five distinct stages. Before 1960 business ethics issues were discussed primarily from a religious perspective. The 1960s saw the
emergence of many social issues involving business and the concept of social conscience
as well as a rise in consumerism, which culminated with Kennedy’s Consumers’ Bill of
Rights. Business ethics began to develop as an independent field of study in the 1970s, with
academics and practitioners exploring ethical issues and attempting to understand how
individuals and organizations make ethical decisions. These experts began to teach and
write about the idea of corporate social responsibility, an organization’s obligation to maximize its positive impact on stakeholders and minimize its negative impact. In the 1980s,
centers of business ethics provided publications, courses, conferences, and seminars, and
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Chapter 1: The Importance of Business Ethics
23
many companies established ethics committees and social policy committees. The Defense
Industry Initiative on Business Ethics and Conduct was developed to guide corporate support for ethical conduct; its principles had a major impact on corporate ethics.
However, less government regulation and an increase in businesses with international operations raised new ethical issues. In the 1990s, government continued to support
self-regulation. The FSGO sets the tone for organizational ethics programs by providing incentives for companies to take action to prevent organizational misconduct. The
twenty-first century ushered in a new set of ethics scandals, suggesting many companies
had not embraced the public’s desire for higher ethical standards. The Sarbanes–Oxley
Act stiffened penalties for corporate fraud and established an accounting oversight board.
The Dodd–Frank Wall Street Reform and Consumer Protection Act was later passed to
reform the financial system. The current trend is away from legally based ethical initiatives
in organizations and toward cultural initiatives that make ethics a part of core organizational values. The ethical component of a corporate culture relates to the values, beliefs,
and established and enforced patterns of conduct employees use to identify and respond to
ethical issues. The term ethical culture describes the component of corporate culture that
captures the rules and principles an organization defines as appropriate conduct. Ethical
culture can be viewed as the character of the decision-making process employees use to
determine whether their responses to ethical issues are right or wrong.
Research and anecdotes demonstrate building an ethical reputation among employees,
customers, and the general public provides benefits that include increased efficiency in
daily operations, greater employee commitment, increased investor willingness to entrust
funds, improved customer trust and satisfaction, and better financial performance. The
reputation of a company has a major effect on its relationships with employees, investors,
customers, and many other parties, and thus has the potential to affect its bottom line.
Finally, this text introduces a framework for studying business ethics. Each chapter
addresses some aspect of business ethics and decision making within a business context.
The major concerns are ethical issues in business, stakeholder relationships, social responsibility and corporate governance, emerging business ethics issues, the institutionalization
of business ethics, understanding the ethical decision-making process, moral philosophies
and cognitive moral development, corporate culture, organizational relationships and conflicts, developing an effective ethics program, implementing and auditing the ethics program, global business ethics, ethical leadership, and sustainability.
IMPORTANT TERMS FOR REVIEW
morals 4
business ethics 5
Federal Sentencing Guidelines for
Organizations 12
principles 5
Sarbanes–Oxley Act 13
values 5
Dodd–Frank Wall Street Reform and Consumer
Protection Act 13
Consumers’ Bill of Rights 10
Corporate social responsibility 11
ethical culture 14
Defense Industry Initiative on Business Ethics
and Conduct 11
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
24
Part 1: An Overview of Business Ethics
RESOLVING ETHICAL BUSINESS CHALLENGES*
Lael was just hired by Best East Motels into their manager training program and was excited about the potential benefits after her graduation from Florida State
University. Working part-time and going to school fulltime was the norm for her, but the Best East job replaced
her two part-time jobs. With this new job, she would
be the one to assign work times. Her luck continued
when she met her mentor Nikhil, who was the son of
the owner. Best East Motels was a franchise motel chain
in the United States. Owners bought into the chain with
a $500,000 franchise fee and paid for the construction
of the motel. In return for the fee, Best East gave each
owner a comprehensive package of marketing, management, accounting, and financial materials to boost motel
success rates to over 90 percent. In addition, Best East
assisted each owner with groups of people that trained
staff for every new job, from housekeeping to accounting. The new-hire training course for each type of
employee was developed and based on the best practices
within the industry. This particular motel had been in
business for 10 years and was seen as successful.
As Lael went through the manager training program, everything she heard was great. It sounded like
Best East was a career path she would want to pursue
long-term. Six months into her job, however, Lael started
to hear strange rumors. For example, on the night shift
she found there was heavy employee turnover and most
were females. Lael began to investigate by scheduling
herself onto several night shifts. One night, as she chatted with one of the front desk employees, she discovered the girl planned on quitting. She was seventeen and
worked at this Best East motel for a year. “Why are you
leaving?” asked Lael.
Her reply startled Lael. “I don’t want trouble, just
my last paycheck, a good letter of recommendation, and
that’s it.”
As Lael pressed her for more information, the
17-year-old opened up. She spoke about Nikhil talking
suggestively about her to other employees and how he
made suggestive physical gestures when she was around.
She told Lael about other female employees treated similarly, and this always occurred during night shifts when
Nikhil was on duty.
Digging a little deeper, Lael spoke to several former
employees. Most were fairly young female employees.
They told her essentially the same thing. For example,
Nikhil would routinely make suggestive comments to
female employees. In one incident under Nikhil’s watch,
some male employees flirted with female employees,
including undocumented workers. Nikhil reportedly
sat there with a smile. They also told her Nikhil allowed
customers at the motel to offer their room keys to female
employees.
After a few weeks, Lael heard the same story from
younger female employees and even some of the maids.
Their responses to these situations were similar. They
ranged from “Nikhil told me if I was older he would ask
me out” to “I don’t want to make a big deal out of this
because it might appear I’m a tattle tale.” Another common excuse for not reporting was that Nikhil assured
them this was part of the motel business and was normal. Most employees were afraid to report on the boss’s
son and put their jobs on the line.
Lael reviewed the section of the franchise employee
handbook. It clearly stated sexual harassment of any
kind would not be tolerated and should be reported
immediately to the proper manager. Lael could tell from
the manual the allegations against Nikhil constituted
sexual harassment. While the Best East Franchise Corporation had no ethics hotline, Lael thought this could
be a legal issue.
She knew putting pressure on the female employees
to report the behavior of the boss’s son was problematic.
Lael also felt that going to Nikhil personally about these
allegations may not be a wise move. If the behavior was
reported to the owner, it would become an official allegation and impact the motel’s reputation and image in
the community, and she would be responsible for it. The
things these women were saying had not personally happened to her yet.
|
QUESTIONS EXERCISES
1. Why should Lael get involved in reporting if she
has not experienced any of the allegations the other
employees are making?
2. What are some of the characteristics of Best East’s
ethical culture that would create the current dilemma
for Lael?
3. What should Lael do to resolve her concerns?
*This case is strictly hypothetical; any resemblance to real persons,
companies, or situations is coincidental.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
25
Chapter 1: The Importance of Business Ethics
> > > CHECK YOUR EQ
Check your EQ, or Ethics Quotient, by completing the following. Assess your performance to evaluate your
overall understanding of the chapter material.
1. Business ethics focuses mostly on personal ethical issues.
Yes
No
2. Business ethics deals with right or wrong behavior within a particular
organization.
Yes
No
3. An ethical culture is based upon the norms and values of the company.
Yes
No
4. Business ethics contributes to investor loyalty.
Yes
No
5. The trend is away from cultural or ethically based initiatives to legal initiatives in
organizations.
Yes
No
6. Investments in business ethics do not support the bottom line.
Yes
No
ANSWERS 1. No. Business ethics focuses on organizational concerns (legal and ethical—employees, customers,
suppliers, society). 2. Yes. That stems from the basic definition. 3. Yes. Norms and values help create an organizational
culture and are key in supporting or not supporting ethical conduct. 4. Yes. Many studies have shown that trust and
ethical conduct contribute to investor loyalty. 5. No. Many businesses are communicating their core values to their
employees by creating ethics programs and appointing ethics officers to oversee them. 6. No. Ethics initiatives create
consumer, employee, and shareholder loyalty and positive behavior that contribute to the bottom line.
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
26
Part 1: An Overview of Business Ethics
ENDNOTES
1. Guido Palazzo, Franciska Krings, and Ulrich Hoffrage,
“Ethical Blindness,” Journal of Business Ethics 109, 3
(2012): 323–338.
2. Matt Rocheleau, “64 Dartmouth College students face
discipline over cheating,” The Boston Globe, January 8,
2015, http://www.bostonglobe.com/metro/2015/01/08/
dartmouth/GN8oLJcgKj7R1nOoPNiLdL/story.html
(accessed January 27, 2015).
3. Sharon Terlep, “North Carolina Academic Fraud Went
on for Years amid Lax Oversight, Report Finds,” The
Wall Street Journal, October 22, 2014, http://www.wsj.
com/articles/report-details-academic-scandal-at-northcarolina-1413997202 (accessed January 27, 2015).
4. United v. Federal Election Commission, 558
U.S. 310 (2010), http://www.supremecourt.gov/
opinions/09pdf/08-205.pdf (accessed July 27, 2015).
5. Wroe Alderson, Dynamic Marketing Behavior
(Homewood, IL: Irwin, 1965), 320.
6. Ethisphere Institute, “2014 World’s Most Ethical
Companies,”Ethisphere, http://ethisphere.com/worldsmost-ethical/wme-honorees/ (accessed January 29, 2015).
7. Jacquelyn Smith, “The World’s Most Ethical Companies,”
Forbes, March 6, 2013, http://www.forbes.com/sites/
jacquelynsmith/2013/03/06/the-worlds-most-ethicalcompanies-in-2013/ (accessed February 5, 2015).
8. Ethics Resource Center, National Business Ethics Survey
of the U.S. Workforce (Arlington, VA: Ethics Resource
Center, 2014), 10–13.
9. Dan Fitzpatrick and Robin Sidel, “New J.P. Morgan Jam,”
The Wall Street Journal, November 16, 2012, C1–C2;
Robert W. Wood, “Credit Suisse: Guilty, $2.6 Billion
Fine, But Avoids Death in U.S.—UBS Was Luckier,”
Forbes, May 19, 2014, http://www.forbes.com/sites/
robertwood/2014/05/19/credit-suisse-guilty-2-5-billionfine-but-avoids-death-in-u-s-ubs-was-luckier/ (accessed
January 28, 2015).
10. Edelman, 2015 Edelman Trust Barometer, http://www.
edelman.com/insights/intellectual-property/2015edelman-trust-barometer/trust-and-innovation-edelmantrust-barometer/global-results/ (accessed January 30,
2015).
11. Leonidas C. Leonidou, Olga Kvasova, Constantinos N.
Leonidou, and Simo Chari, “Business Unethicality as an
Impediment to Consumer Trust: The Moderating Role
of Demographic and Cultural Characteristics,” Journal of
Business Ethics 112, 3 (2013): 397–415.
12. Carlos Tejada, “China, Alibaba Clash Publicly Over Fake
Goods,” The Wall Street Journal, January 28, 2015, http://
www.wsj.com/articles/chinas-saic-criticizes-alibaba-overfake-goods-1422425378 (accessed January 28, 2015).
13. Carmen Nobel, “Banning Big-Box Stores Can Hurt Local
Retailers,” Forbes, July 7, 2014, http://www.forbes.com/
sites/hbsworkingknowledge/2014/07/07/banning-bigbox-stores-can-hurt-local-retailers/ (accessed January
28, 2015).
14. Associated Press, “Ex-New Orleans Mayor Ray Nagin
reports to federal prison to begin 10-year sentence,” Fox
News, September 8, 2014, http://www.foxnews....
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