Ethics, Social Responsibility, and the Entrepreneur

Earning

a profit is one of an entrepreneur's primary reasons for going into business, and it is an essential

requirement for staying in business.

Profits give owners a return on their investment, employees steady work, customers the goods and services they
desire, and the government the tax dollars it requires. But does a small company's responsibility end with earning a profit?
Our society says not. A recent Business Week/Harris poll found that 95 percent of adults reject the view that a company's
only role is to make money. Increasingly, society is imposing on firms the additional standard of considering the ethical
and the social as well as the economic impact of their decisions.
Ethics involves the moral values and behavioral standards businesspeople draw on as they make decisions and solve
problems. It originates from a commitment to do what is right. Ethical behaviordoing what is "right" and "good" as
opposed to "wrong" and "bad"is the result of such a commitment. However, an inherent difficulty exists in determining
what constitutes ethical behavior. In some instances, the ethical dilemma is obvious, the implications of unethical actions
are clear, and established guidelines for handling the situation exists. The owner is keenly aware of the ethical entrapment
that awaits her and knows that she will be held accountable for her actions.
In most situations, however, ethical dilemmas are less obvious, cloaked in the garb of mundane decisions and
everyday routine. Because they easily can catch entrepreneurs off guard and unprepared, these are the ethical challenges
that are most likely to ensnare the unwary. It is these ethical "sleepers" that often catch unwary entrepreneurs, destroying
their reputations as well as those of their companies. To make proper ethical choices, therefore, an entrepreneur must first
be aware that a situation with ethical dimensions exists." Awareness is the key," says one ethics consultant. "So many
people get in trouble, not because they meant to be unethical, but because they lacked sensitivity and awareness."
Complicating the issue even more is that, in some ethical dilemmas, no clear-cut, right (or wrong) answers exist. There is
no conflict between good and evil, right and wrong, truth and falsehood; instead, there is only the issue of conflicting
interests among the company's various stakeholders, the various groups and individuals who affect and are affected by the
company. These conflicts have forced many businesses to identify their stakeholders and lo consider the ways they will
deal with them. For example, when the founders of a small company producing frozen foods make business decisions,
they must consider how those decisions will influence, and be influenced by, its team of employees; the farmers and the
companies that supply it with raw materials; the union that represents its workers in collective bargaining; the government
agencies that regulate a multitude of its activities; the banks that provide it with financing; the investors who own its
stock; the general public it serves; the community in which it operates; and, of course, the customers who purchase its
products. Every entrepreneur must consider the roles these and other key stakeholders play in the operation of her
business.
The power these stakeholders wield determines to a great extent the degree of success a company can achieve.
Relationships among a company and its multitude of stakeholders are becoming more complex, creating more ethical
dilemmas. To make a decision, an entrepreneur often must balance the needs and the demands of these various
stakeholders, knowing that whatever the final decision is, not every group will be satisfied.

Society is demanding, a higher standard of behavior from businesses today, and businesses large and small must
reevaluate their responsibilities to society as a whole. A socially responsible business considers not only what is best for
the firm but also what is best for society.
It is this vital link between businesses and the people of society that gives rise to the key concepts of ethics and social
responsibility. No business can ignore the ethical demands of society and expect to thrive.

An Ethical Perspective:
Business ethics consist of the fundamental moral values and behavioral standards that form the foundation for the people
of an organization as they make decisions and interact with stakeholders. Business ethics is a sensitiveand highly
complexissue, but it is not a new one. In 560 B.C., the Greek philosopher Chilon claimed that a merchant does better to
take a loss than to make a dishonest profit.
Maintaining an ethical perspective is crucial to creating and protecting a company's reputation, but it is no easy task.
Ethical dilemmas abound in the decisions that entrepreneurs and managers face every day. However, these dilemmas may
be severest and most apparent in entrepreneurial companies that lack the mega-budgets and -balance sheets of their larger
counterparts. Although every company confronts ethically charged issues, the limited resources of small start-ups make
them extremely susceptible to ethical breaches. The entrepreneurs guiding these companies may be on the verge of
"making it," and pulling ethics aside to gain a short-term advantage can be incredibly tempting. For example, Ralph
Warner, co-founder of Nolo Press, a successful publisher of self-help law books, faced an ethical dilemma when, on the
eve of shipping out his company's new book, Congress announced a major lax overhaul. Warner had a choice: ship the
books with outdated information or scrap the books and start over, which would cause the company to incur a large
expense. In the end, Warner decided not to ship the books, which, he says, cost money only in the short run. He strongly
believes that the long-run cost of having shipped the outdated books would have been much higher and that his company's
reputation has benefited by not succumbing to the temptation to cut comers.

Succumbing to such unethical temptations ultimately will destroy a company's reputation. And reputation is one of
the most precious, and most fragile, possessions a company has. Donald Perkins, former chairman and CEO of Jewel
Companies, a successful chain of supermarkets, explains:
Reputation is fundamental. It represents the future of any organization, and an executive shouldnt hesitate to take
the necessary steps to maintain it. Everyone understands an error. But ethical transgressions are not errors .5
Building a solid reputation for ethical propriety typically takes a long time; unfortunately, destroying that reputation takes
practically no time at all, and the effects linger. Avon CEO James Preston likens a bad reputation to a hangover. "It takes a
while to get rid of, and it makes everything else hurt," he says .6 an entrepreneur's goal is to build a solid ethical reputation
for the company and then do everything possible to maintain it. According to one ethicist, "The best way to benefit from a
good reputation is to keep doing the things that earned it for you in the first place.

1. The law, which defines for society as a whole what actions are permissible and which are not. The law merely
establishes the minimum standard of behavior. Actions that are legal, however, may not necessarily be ethical.

Simply obeying the law is insufficient as a guide for ethical behavior; ethical behavior requires more. Few ethical
issues are so uncomplicated and unidimensional that the law can serve as the acid test for making a decision.
2. The policies and procedures of the organization, which serve as specific guidelines for people as they make daily
decisions. Many colleges and universities have established honor codes, and companies rely on policies covering
everything from sexual harassment and gift giving to hiring and whistleblowing. Research suggests that some 95
percent of Fortune 500 companies and nearly half of all businesses have written codes of ethics in place. 9
3. The moral stance individuals take when faced with a decision not governed by formal rules. The values people learn
from an early age in the family, in church or synagogue, and in school are key ingredients at this level. A major
determinant of ethical behavior is training. As Aristotle said thousands of years ago, you get a good adult by teaching
a child to do the right thing. The culture of a company can serve to either support or to undermine its employees'
concept of what constitutes ethical behavior.
Every businessperson faces at least one ethical issue every day, and some ethical choices can be tough to make. But,
that's not necessarily bad! Such situations give small business people the opportunity to practice good ethics and to do
what is right. One ethicist explains, "Morals are like muscles. The more we flex them, the stronger they get. Ethics is a
practical skill. If we don't use them, we lose them; and the more we use them, the better we get at it."'" No one can escape
the consequences of the ethical decisions made over the course of a career.
The pressure to take shortcuts or to violate ethical standards is always present. One classic study reported that, at some
point in their careers, 75 percent of managers felt a conflict between profit considerations and being ethical." Another
study indicated that 65 percent of managers sometimes felt pressure to compromise their personal ethical standards
.12 Without a supportive ethical structure, employees in such positions are likely to make the "wrong" ethical choices, and
that can be devastating. According to one small business owner, "One employee acting unethically can give the entire
company a bad reputation." Therefore, he claims, "Business ethics should be a constant priority of top management."

AN ETHICAL FRAMEWORK
To cope successfully with the myriad ethical decisions they face, entrepreneurs must develop a workable ethical
framework to guide them. Although many such frameworks exist, the following four-step process can work
quite
well.
Step.1 Recognize the ethical dimensions involved in the dilemma or decision.
Before an entrepreneur can make an informed ethical decision, she must recognize that an ethical situation
exists. Only then is it possible to define the specific ethical issues involved. Too often, business owners fail to
take into account (he ethical impact of a particular course of action until it is too late. To avoid ethical
quagmires, entrepreneurs must consider the ethical forces at work in a situationhonesty, fairness, respect for
community, concern for the environment, trust, and othersto have a complete view of the decision.
Step.2 identify the key stakeholders involved and determine how the decision will affect them. Every

business influences, and is influenced by, a multitude of stakeholders. Frequently, the demands of these
stakeholders conflict with one another, putting a business in the position of having to choose which groups to
satisfy and which to alienate. Before making a decision, managers must sort out the conflicting interests of the
various stakeholders by determining which ones have important stakes in the situation. Although this analysis
may not resolve the conflict, it will prevent the company from inadvertently causing harm to people it may have
failed to consider.
Step 3. Generate alternative choices and distinguish between ethical and unethical responses.
Small business managers will find the questions in Table 21.1 to be helpful.
Step 4. Choose the "best" ethical response and implement it.
At this point, there likely will be several ethical choices from which managers can pick. Comparing these
choices with the "ideal" ethical outcome may help managers make the final decision. The final choice must be
consistent with the company's goals, culture, and value system as well as those of the individual decision
makers.

Who is Responsible for Ethical Behavior?

Although companies may set ethical standards and offer guidelines for employees, the ultimate decision on
whether to abide by ethical principles rests with the individual. In other words, companies really are not ethical
or unethical; individuals are. Managers, however, can greatly influence individual behavior within the company.
And that influence must start at the top. A chief executive officer who practices ethical behavior establishes the
moral tone for the entire organization. "In a small company, the [ethical] standards depend almost entirely on
the entrepreneur's personality, beliefs, and sense of self," says one expert. 14 Good ethics starts at the top and
works its way downward through the entire organization. "If the executive suite is perceived as cutting comers,"
says one manager, "that attitude filters down to the lowest levels." 15 Table 21.2 on page 730 summarizes the
characteristics of the three ethical styles of management: immoral, amoral, and moral management.
THE BENEFITS OF MORAL MANAGEMENT

I.
II.
III.
IV.
V.
VI.

Does this decision or action meets my standards for how people should interact?
Does this decision or action agrees with my religious teachings and beliefs [or with my personal
principles and sense of responsibility]?
How will I feel about myself if I do this?
Do we [or I] have a rule or policy for cases like this?
Would I want everyone to make the same decision and take the same action if faced with these same
circumstances?
What are my true motives for considering this action?

Moral Rights
VII.

Would this action allow others freedom of choice in this matter?

VIII.

Would this action involve deceiving others in any way?

Justice
IX.
X.
XI.
XII.

Would I feel that this action was just [fair] if I were on the other side of the decision?
How would I feel if this action were done to me or to someone close to me?
Would this action or decision distribute benefits justly?
Would it distribute hardships or burdens justly?

Consequences and Outcomes

XIII.
XIV.
XV.
XVI.
XVII.
XVIII.
XIX.
XX.

What will be the short- and long-term consequences of this action?

Who will benefit from this course of action?
Who will be hurt?
How will this action create well and prevent harm?
Public Justification
How would I feel [or how will I feel] if (or when) this action becomes public knowledge?
Will I be able to explain adequately to others why I have taken this action?
Would others feel that my action or decision is ethical or moral?

Intuition and Insight

XXI.
XXII.
XXIII.

Have I searched for all alternatives? Are there other ways I could look at this situation? Have I
considered all points of view?
Even if there is sound rationality for this decision or action, and even if I could defend it publicly, does
my inner sense tell me this is right?
What does my intuition tell me is the ethical thing to do in this situation? Have I listened to my inner
voice?

SOURCE:

Sherry

Eater,

"Ethical

Judgment,"

Executive

Excellence,

March

1792,

pp.

7-8.

Competitive Pressures. If competition is so intense that a company's survival is threatened, managers may
begin to view what were once unacceptable options as acceptable. Managers and employees are under such
pressure to produce mat they may sacrifice their ethical standards to reduce the fear of failure or the fear of
losing their jobs, A study conducted by the Ethics Resource Center found that 30 percent of employees admitted
to feeling pressure to compromise their company's ethical standards because of deadlines, overly aggressive
objectives, concerns about the company's survival,
Opportunity Pressures. When the opportunity to "get ahead" by taking some unethical action presents itself,
some people cannot resist the temptation. The greater the reward or the smaller the penalty for unethical acts,
the greater is the probability that such behavior will occur. If managers, for example, condone or even
encourage unethical behavior, they can be sure it will occur. Those who succumb to opportunity pressures often

make one of two mistakes: They overestimate the cost of doing the right thing, or they underestimate the cost of
doing the wrong thing. Either error can lead to disaster. "I really wish you guys would knock that off."

Globalization of Business. The globalization of business has intertwined what once were distinct cultures. This
cultural cross-pollination has brought about many positive aspects, but it has created problems as well.
Companies have discovered that there is no single standard of ethical behavior applying to all business
decisions in the international arena. Practices that are illegal in one country may be perfectly acceptable, even
expected, in another. Actions that would send a businessperson to jail in Western nations are common ways of
working around the system in others. For example, as pun of Russia's move 10 privatize formerly governmentowned businesses, government officials decided to sell the 1,777-room Cosmos Hotel, originally built for the
1980 Olympics. The hotel generates revenues of $100 million a year fin hard currency) and produces profits of
$10 million each year. Although such a business would sell for at least $100 million in the United States or in
Western Europe, Mikhail Kharshan bought a 25 percent interest In the Cosmos for a mere $2.5 million! Getting
the property at just JO percent of its value was no easy task. As an insider, Kharshan knew the hotel would be
put up for sale before most people did, and he used the extra time to scare off rival bidders for the popular hotel.
He bribed journalists from two influential business papers to publish negative financial reports about the
Cosmos. Then he arranged to be interviewed on Russian television, where he talked about the poor state of the
Russian hotel industry. He bribed government officials to limit the Cosmos auction to just two locations and
then bribed two other likely bidders not to participate in the auction. The result: Kharshan was the only serious
bidder at the auction; that's how he managed to get the hotel at such a bargain. Kharshan says that his actions,
although unethical by U.S. business standards, "are normal business practices in Russia. We didn't shoot anyone
and we didn't violate any laws."