Business Ethics

An Overview

Introduction

Increasing corporate failures have made BECG part of the syllabus in b-schools Ethics is a branch of philosophy It is normative science because it deals with norms of human conduct

Morality and Ethics

Morality

Refers to human conduct and values Refers to the study of human behavior in relation to moral values The study of what is morally right or wrong However, this does not lead to a single course of action but offers a means of evaluation among competing options

Ethics

How are Moral standards formed

Moral standards are shared in a society Influenced by upbringing, values passed on through heritage, behavior of others, culture, life experiences, etc. Religion provides its own set of moral instructions, beliefs, values, etc. Highest Moral Ideal

Do unto others as you would have them do unto you

Morality and Law

Law

Codification of national ideals, norms, customs and moral values

An action can be illegal, but morally right An action that is legal can be morally wrong

Objectives of Ethics

Assess whether an act is moral Establish moral standards and norms Judge behavior based on these standards Assess behavior and express an opinion about the behavior Set a standard and make recommendations

Metaethics

Study of origin and meaning of ethical concepts Deals with 3 issues

Metaphysical issues do moral values exist independently of humans or are they human conventions Psychological issues what is psychological basis of moral action Linguistic issues the meaning of moral terms
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Normative Ethics

Normative Ethics implies something which guides human conduct Sets out moral standards that help to determine what is right and wrong Golden Rule we should treat others the same way that we want others to treat us Lays down set of fundamental principles such as moral rights to life and liberty which serve as a guide
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Normative Theories

Consequentialist (Teleological)

Egoism Utilitarianism Kantian Theories

Non-consequentialist (Deontological)

Egoism

Morality is associated with self-interest Decisions are intended to provide positive consequences for the individual without consideration to the consequences on others Not necessary that the decision should harm others Divided into

Personalist Theory persons should pursue their long term interest, and should not dictate what others should do Impersonalist Theory everyone should follow their best long term interest

Psychological Egoism

Egoism is derived from the idea that humans by nature are selfish Even whistle blowing is because the person wants to take revenge or because he wants celebrity status

Criticism of Egoism

Subjective moral standard motivated by own best interests and so not objective Unsound because it assumes all actions are motivated by self interest By emphasizing self interest it does not stand against many personal and organizational vices

Utilitarianism

Decision is ethical if it provides greater net utility than other alternatives The quantity of harm must be deducted from the quantity of good to obtain net utility

Criticism of Utilitarianism

Difficult to quantify utility since it is subjective and varies with time Lack of clarity about what is a benefit and what is a cost

Kantianism

Humans have a capacity to act from principle Only when we act from duty does action have moral worth Acting out of feeling, inclination or self interest does not have moral worth even if the decision is the same Rationality is the ultimate good, blind beliefs cannot be the foundation for morality e.g., lying is always wrong

Kantianism

Focus on fundamental duties of human beings, such as not committing murder or theft Classification

Duties to God - including honoring and praying to him Duties to Oneself - includes preserving ones life and sharing happiness Duties to Others including family duties, social duties and political duties
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Personal Ethics

Conception of what is regarded as desirable Application of these to everything one does Principles

Concern and respect for others autonomy Honesty and willingness to comply with law Fairness and ability not to take undue advantage of others Benevolence and preventing harm to any creature

Motivation for Personal Ethics

Need to maintain a clear conscience Ensure that no harm is done to others Obligation of observe law Social and material well being depends on ethical behavior

Professional Ethics

Professional is engaged in a specific activity as his paid occupation Principles

Impartiality: objectivity Openness: full disclosure Confidentiality: trust Due diligence/duty of care Fidelity to professional responsibilities Avoiding potential of apparent conflict of interest

Business Ethics

Is the sum total of principles and code of conduct that businessmen are expected to follow in their dealings with stakeholders and to comply with enacted laws Involves systemizing, defending and recommending concepts of right and wrong behavior

What is not Business Ethics

Different from religion Is not the same as law Different from cultural traits Different from feelings Is not a strictly speaking a science Not just a collection of values

Why Business Ethics

Promotes good to society, improves profitability, fosters business relations, increases employee productivity, reduces criminal penalties, allows people to act consistent with their ethical beliefs, etc. Ethical problems occur in business because of greed, competitive pressures, clash of personal values and business goals, cross cultural contradictions, etc.

Benefits from Business Ethics

Has substantially improved society enactment of various laws Contributes to high productivity and team work Ethical guidelines allow adherence even in difficult times Creates strong public image

Importance of Business Ethics

Closely related to trust which improves branding Unethical behavior can get the business and its employees into serious trouble Increases long term profitability of the business Frees the mind to take correct decisions instead of exhausting it in subterfuge Protects interest of business community as a whole To fulfill commitment to society

Business Ethics and Profit

An unprofitable business is a burden to society A loss making business misuses scarce resources It cannot discharge its social responsibilities in terms of employment, efficiency, etc. Not easy to establish a relationship because business and ethics are incompatible
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Normative Theories of Business Ethics

Businessmen are not philosophers and so need a set of ethical principles that are easy to use Normative theories give ethical guidance to carry out day to day business Each of the theories is distinctly different and so only one of them is correct

Normative Theories of Business Ethics

Stockholder Theory Stakeholder Theory Social Contract Theory

Stockholder Theory

Managers are agents for stockholders and have a fiduciary responsibility This must stop them from spending resources on anything which provides societal benefits Therefore a business does not have social responsibilities The theory stresses that legal non-deceptive means must be used to create profit The invisible hand leads to good for society

Criticism of Stockholder Theory

Free markets do not lead to the common good because of market failures In todays world governments do play a big role in markets

Stakeholder Theory

Stakeholder is anyone who has a stake including shareholders, customers, employees, community, etc. The firm must ensure an optimal balance among them regardless of financial consequences

Criticism of Stakeholder Theory

Stakeholders can include terrorists, dogs, trees, etc. at the extreme

Social Contract Theory

Firms are duty bound to increase societal welfare There is an implicit agreement between society and any created entity Social welfare and justice must be guiding principles

Criticism of Social Contract Theory

Businesses are set up under the law and so there is a contract This law does not say that the business must fulfill any social welfare or justice requirements which can have adverse financial consequences

Ethical Dilemmas

Conflict between economic performance and social performance, e.g. retrenching workers Social performance includes employment protection and pollution control These incur expenses which impact the bottom line Business ethics has become important as a result
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Morality, Etiquette and Professional Codes

Morality

Moral code of an individual or of a society Unwritten code or rules of social or professional behavior

Etiquette and Professional Codes

Enforcing Business Ethics

Code of conduct Including ethics in performance reviews Ethics audit

Code of Conduct

Integrity morally upright Impartiality fair and unprejudiced Responsiveness to public interest Accountability to all stakeholders Honesty no cheating, lying or stealing Transparency frank and open

Corporate Governance

Set of policies and procedures used by directors to conduct company affairs and their relationship with shareholders to whom they are responsible as managers

Principles of CG Ethics

Honesty and integrity avoiding conflict of interest in relationships Provide accurate, complete, objective, relevant, timely and understandable information Comply with laws Act in good faith, responsibly, with due care, competence and diligence Protect confidentiality of information Ensure confidential information is not used

Ethics and CG

Operate ethically so that all stakeholders are treated fairly Look at all stakeholders, not only at shareholders Should come from within not imposed by regulators Many provisions of corporate laws are not implemented in spirit Many regulations in certain areas are inadequate Should apply to unlisted companies also

Corporate Social Responsibility

Triple Bottom Line

People Planet Profit

The End