Chapter 29: Ethics and Business Practice

Ethics and business

Acting ethically involves acting in a morally correct
and honourable way
It involves an attitude that making profits is not all
that matters
The cost of an ethical approach to business is offset
by an increase in public confidence
The community is more aware of business matters
and the consequences of not acting ethically
Businesses not adopting acceptable ethical standards
are forced to comply by standards imposed by
Parliament
This is partly motivated by high-profile collapses,
such as the HIH Insurance Collapse
o The Corporations Act 2001 (Cth) was amended
to include new standards for auditors, which
became effective on 1 July 2004
The Law and Morality
Ethical relativism
o Laws are relative to their time and their society
o What is an appropriate in one period of time
might not be appropriate in another
o Laws should reflect attitudes of the society in
which they exist
o What is acceptable in one society may not be
acceptable in another
o Social attitudes change over time, resulting in
corresponding changes in the law
What is law?
Determined by individuals moral, political, religious
and ethical views, as well as the society in which they
live
A set of rules, developed over a long period of time,
regulating peoples interactions with each other, and
which sets standards of conduct between individuals
and other individuals, and individuals and the

government, and which are enforceable through

sanction
o A set of rules
o Regulating peoples interactions
o Setting standards of conduct
o Enforceable through sanction
Justice and the law
A concept that is closely associated with law is justice
Justice
o Means that which is right or fair; but
o Is difficult to define;
o Lord Denning suggested:
It is not a product of intellect but of spirit.
The nearest we can go to defining justice is
to say that it is what right-minded
members of the community- those who
have the right spirit within them- believe to
be fair.
The Rule of Law
Laws should conform to a minimum standard of
fairness in both content and procedure
No person must be punished except for a breach of
the law
All persons are equal before the law, irrespective of
status or position
The rights or freedoms of citizens are enforceable in
the courts
Letter of the Law
The strict wording of the law
However, complying with the letter of the law may
not be in accordance with the intention of the law
Spirit of the law
The intention behind the law
Determining compliance with the spirit of the law is
largely a moral or ethical question
Morals and Ethics
Morals

o Concerned with the distinction between right

and wrong
Ethics
o Ethics relate to morals, the treatment of moral
questions, and acting in a morally correct and
honourable way
o Ethical considerations involve going beyond selfinterest in reaching a decision
o An ethical judgment is one that can be seen to
apply to everyone in similar circumstances (not
just one individual)
Ethical opinions are concerned with behavior and
with establishing ways in which people should
behave
o Ethical opinions must be reasoned, and not be
mere personal preferences
o Self-interest is not an ethical reason for acting in
a certain way
o Appearing to be ethical to enhance the interests
of a business is not ethical business conduct
o The public, the government and the companys
shareholders all have an interest in the behavior
of businesses
o A business might adopt an ethical approach for
two reasons:
The market will punish unethical behavior
Governments may legislate to protect
consumers and to control trading
Theories of ethics
Consequentialism/Utilitarianism
Means concerned with consequences
Includes utilitarianism
o Evaluates behavior according to the
consequences of that behavior
Deontological ethics
Doing the right thing regardless of the consequences
The end does not justify the means
Categorical imperative

o Principles that must be obeyed without

exception
Virtue ethics
Moral qualities that require us to act morally
Virtues
o Are personal qualities that provide the basis for
an individual to lead a good and noble life

Moral relativism
Moral values differ in culture, society and time
Ethics in a business context
Examples of common business situations that raise
ethical issues
o Insider training
An example of white collar crime
An unethical business practice that takes
unfair advantage of information not known
to the other party
o Giving and receiving gifts
It depends on the circumstances and
nature of the gift
There is no such thing as a free lunch
Conflict between commercial interests and social
utility
o Certain corporations have a responsibility to
balance their business interests and their
special community needs
o See International Trade Integrity Act 2007 (Cth)
Conflict of interest
o Will arise when an individual cannot fairly and
properly act in the interests of one party
o Without prejudicing the right and interests of
another party for whom the individual also acts
Unconscionable contracts
o Contracts that are grossly unfair and good
conscience

o [Commercial Bank of Australia Ltd v Amadio

[1983] HCA 14]
o [Australian Competition and Consumer
Commission v Reshaw [2005] FCA 558]
Misuse of limited liability of company
o This is the abuse of the separate legal entity
doctrine
Tax evasion/ tax havens

Corporations and Ethics

Business ethics is about how business affairs are
conducted
It is about individuals and the institutions with which
they deal
It is about expectations and requirements, including
the social and economic requirements of society
A corporation is a legal entity
At registration
o A corporation is given the legal status of a
person, separate and distinct from its
shareholders and its directors
The law recognizes the corporation as a person
o Even though it does not exist in a physical sense
o It has ethical responsibilities
Company directors
o Have a fiduciary duty to act in the interests of
their company and the best interests of the
shareholders
o But this often gives rise to many ethical
considerations, which often conflict with one
another
o Raising issues in relation to:
Institutionalized wrongdoing
Organizational integrity

 Corporate codes of conduct

o Some companies have recognized the value of
adopting an ethical approach to their business
dealings
o And have implemented a code of ethical
conduct
Ethical Investing
This involves investing in companies that operate
ethically, provide social benefits, and are sensitive to
the environment
Takes into consideration such factors as:
o The companys environmental protection,
pollution controls and conservation of resources
o The health and safety of the workplace
o Ethical employment policies
o Or negative factors including:
Armaments and oppressive regimes
Environmentally damaging practices
Unethical employment practices
Tobacco, alcohol, gambling, pomography
Ethical professional advice
Analyse the role and culpability of professional
advisers
Consider large corporations manipulating the court
system
Courts have formal processes and procedures aimed
at enabling the litigating parties to obtain relevant
information/ documents
o E.g. discovery
[McCabe v British American Tobacco Australian
Services Limited [2002] VSC 73]
o This case drew attention to aspects of the
relationship between ethics and the law
o It illustrated an ethical balancing act
o It resulted in amendments to VIC and NSW
legislation relating to the destruction of
evidence

Key Terms
Categorical imperative
o A standard of morality- imperative, because it
establishes principles, and categorical,
because the principles are unconditional with no
exceptions
Consequentialism
o Concerned with the consequences. It is an
approach to morals which evaluates behavior
according to the consequences of that behavior
Corporate culture
o An attitude, policy, rule, course of conduct or
practice existing within the body corporate
generally or in the part of the body corporate
where the relevant activities take place
Deontological ethics
o An ethical system that requires a person to do
the right thing regardless of the consequences
Discovery
o The production by one party, at the request of
the other, of a list of all documents currently or
formerly in the partys possession relating to the
case
Ethical consideration
o Considerations that involve going beyond selfinterest in reaching a decision
Ethical investing
o Investment in companies that operate ethically
provide social benefits and are sensitive to the
environment
Ethical judgment
o A judgment that can be seen to apply to
everyone in similar circumstances and not only
to a particular individual
Ethical opinion
o Opinion concerned with behavior and with
establishing ways in which people should
behave
Ethics

o A system of principles relating to morals, the

treatment of moral questions, and acting in a
morally correct, honourable way
Moral relativism
o Provides that moral values are relative to a
particular environment
Morals
o Concerned with the distinction between right
and wrong
Organisational integrity
o Based on the self-regulation of an organization
in accordance with a formal set of guiding
principles
Utilitarianism
o A form of consequentialism ethics which holds
that an act is right so long as it produces the
greatest good for the greatest number
Virtue ethics
o Stresses the type of moral qualities that put us
in a position to act morally
Virtues
o Personal qualities that provide the basis for an
individual to lead a good and noble life

Key Points
What is the connection between ethics and
business? Acting ethically involves acting in a morally
correct and honourable way. While ethical business
conduct may impose a cost on business, that cost may be
offset by an increase in public confidence.

What is the relationship between law and morality?

Law is a set of rules, developed over a long period of time,
regulating peoples interactions with each other and
setting standards of conduct between individuals and

other individuals, and individuals and the government.

Laws are enforceable through sanction. The strict wording
of a law may allow an individual to do something that is
not really in accordance with the intentions of the law. The
distinction between the letter of the law and the spirit of
the law is largely a moral or ethical problem.
What are morals and ethics? Morals are concerned
with the distinction between right and wrong. Ethics relate
to morals, the treatment of moral questions, and acting in
a morally correct and honourable way. Ethical
considerations involve going beyond self-interest in
reaching a decision. An ethical judgment is one that can
be seen to apply to everyone in similar circumstances and
not only to a particular individual.
What are the main theories of ethics?
Consequentialism/utilitarianism is an approach to
morals which evaluates behavior according to the
consequences of that behavior. The behavior will be
morally right or wrong, depending on whether or not
it produces a specified type of consequence
Deontological ethics requires a person to do the right
thing regardless of the consequences. It is at odds
with consequentialism ethics, in that it considers that
the consequences can never be an appropriate
justification for the act. The end does no, in itself,
justify the means.
What are the main theories of ethics?
Virtue ethics relates to personal qualities that provide
the basis for an individual to lead a good and noble
life. Virtue ethics stresses the type of moral qualities
that put us in a position to act morally
Moral relativism provides that moral values are
relative to a particular environment. It argues that
moral values can differ from one culture to another,
from one society to another.

How might ethics operate in a business context?

Following are examples of common business situations
that raise ethical issues.
Insider trading
Giving and receiving gifts
Conflict between commercial interests and social
utility
Conflict of interest
Unconscionable contracts
Misuse of limited liability of a company
Tax evasion/ tax havens
What are some of the ethical issues relating to
business activity?
Corporations
o Institutionalised wrongdoing
o Organizational integrity
Ethical investing
Ethical professional advice