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What Is Business Ethics?

Definition, Principles, and
Importance
By ALEXANDRA TWIN Updated January 25, 2024

Reviewed by AMY DRURY

Fact checked by YARILET PEREZ

What Is Business Ethics?

Business ethics is the moral principles, policies, and
values that govern the way companies and
individuals engage in business activity. It goes
beyond legal requirements to establish a code of
conduct that drives employee behavior at all levels
and helps build trust between a business and its
customers.

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KEY TAKEAWAYS
Business ethics refers to implementing
appropriate business policies and
practices with regard to arguably
controversial subjects.
Some issues that come up in a discussion of
ethics include corporate governance, insider
trading, bribery, discrimination, social
responsibility, and fiduciary responsibilities.
The law usually sets the tone for business
ethics, providing a basic guideline that
businesses can choose to follow to gain
public approval.

Business Ethics

Investopedia / Katie Kerpel

Understanding Business Ethics

Business ethics ensure that a certain basic level of
trust exists between consumers and various forms of
market participants with businesses. For example, a
portfolio manager must give the same consideration
to the portfolios of family members and small
individual investors as they do to wealthier clients.
These kinds of practices ensure the public receives
fair treatment.

The concept of business ethics began in the 1960s as

corporations became more aware of a rising
consumer-based society that showed concerns
regarding the environment, social causes, and
corporate responsibility. The increased focus on
"social issues" was a hallmark of the decade.

Since that time, the concept of business ethics has

evolved. Business ethics goes beyond just a moral
code of right and wrong; it attempts to reconcile
what companies must do legally vs. maintaining a
competitive advantage over other businesses. Firms
display business ethics in several ways.

Important: Business ethics ensure a

certain level of trust between consumers
and corporations, guaranteeing the public
fair and equal treatment.

Principles of Business Ethics

It's essential to understand the underlying principles
that drive desired ethical behavior and how a lack of
these moral principles contributes to the downfall of
many otherwise intelligent, talented people and the
businesses they represent.

There are generally 12 business ethics principles:

Leadership: The conscious effort to adopt,

integrate, and emulate the other 11 principles to
guide decisions and behavior in all aspects of
professional and personal life.
Accountability: Holding yourself and others
responsible for their actions. Commitment to
following ethical practices and ensuring others
follow ethics guidelines.
Integrity: Incorporates other principles—honesty,
trustworthiness, and reliability. Someone with
integrity consistently does the right thing and
strives to hold themselves to a higher standard.
Respect for others: To foster ethical behavior and
environments in the workplace, respecting others
is a critical component. Everyone deserves
dignity, privacy, equality, opportunity,
compassion, and empathy.
Honesty: Truth in all matters is key to fostering
an ethical climate. Partial truths, omissions, and
under or overstating don't help a business
improve its performance. Bad news should be
communicated and received in the same manner
as good news so that solutions can be developed.

Respect for laws: Ethical leadership should

include enforcing all local, state, and federal
laws. If there is a legal grey area, leaders should
err on the side of legality rather than exploiting a
gap.
Responsibility: Promote ownership within an
organization, allow employees to be responsible
for their work, and be accountable for yours.
Transparency: Stakeholders are people with an
interest in a business, such as shareholders,
employees, the community a firm operates in,
and the family members of the employees.
Without divulging trade secrets, companies
should ensure information about their financials,
price changes, hiring and firing practices, wages
and salaries, and promotions are available to
those interested in the business's success.
Compassion: Employees, the community
surrounding a business, business partners, and
customers should all be treated with concern for
their well-being.
Fairness: Everyone should have the same
opportunities and be treated the same. If a
practice or behavior would make you feel
uncomfortable or place personal or corporate
benefit in front of equality, common courtesy,
and respect, it is likely not fair.

Loyalty: Leadership should demonstrate

confidentially and commitment to their
employees and the company. Inspiring loyalty in
employees and management ensures that they
are committed to best practices.
Environmental concern: In a world where
resources are limited, ecosystems have been
damaged by past practices, and the climate is
changing, it is of utmost importance to be aware
of and concerned about the environmental
impacts a business has. All employees should be
encouraged to discover and report solutions for
practices that can add to damages already done.

Why Is Business Ethics Important?

There are several reasons business ethics are
essential for success in modern business. Most
importantly, defined ethics programs establish a
code of conduct that drives employee behavior—
from executives to middle management to the
newest and youngest employees. When all
employees make ethical decisions, the company
establishes a reputation for ethical behavior. Its
reputation grows, and it begins to experience the
benefits a moral establishment reaps:

Brand recognition and growth

Increased ability to negotiate
Increased trust in products and services
Customer retention and growth
Attracts talent
Attracts investors

When combined, all these factors affect a business'

revenues. Those that fail set ethical standards and
enforce them are doomed to eventually find
themselves alongside Enron, Arthur Andersen, Wells
Fargo, Lehman Brothers, Bernie Madoff, and many
others.

Types of Business Ethics

There are several theories regarding business ethics,
and many different types can be found, but what
makes a business stand out are its corporate social
responsibility practices, transparency and
trustworthiness, fairness, and technological
practices.

Corporate Social Responsibility

Corporate social responsibility (CSR) is the concept
of meeting the needs of stakeholders while
accounting for the impact meeting those needs has
on employees, the environment, society, and the
community in which the business operates. Of
course, finances and profits are important, but they
should be secondary to the welfare of society,
customers, and employees—because studies have
concluded that corporate governance and ethical
practices increase financial performance. [1]

Important: Businesses should hold

themselves accountable and responsible
for their environmental, philanthropic,
ethical, and economic impacts.

Transparency and Trustworthiness

It's essential for companies to ensure they are
reporting their financial performance in a way that is
transparent. This not only applies to required
financial reports but all reports in general. For
example, many corporations publish annual reports
to their shareholders.

Most of these reports outline not only the submitted

reports to regulators, but how and why decisions
were made, if goals were met, and factors that
influenced performance. CEOs write summaries of
the company's annual performance and give their
outlooks.

Press releases are another way companies can be

transparent. Events important to investors and
customers should be published, regardless of
whether it is good or bad news.

Technological Practices and Ethics

The growing use of technology of all forms in
business operations inherently comes with a need
for a business to ensure the technology and
information it gathers is being used ethically.
Additionally, it should ensure that the technology is
secured to the utmost of its ability, especially as
many businesses store customer information and
collect data that those with nefarious intentions can
use.

Fairness
A workplace should be inclusive, diverse, and fair for
all employees regardless of race, religion, beliefs,
age, or identity. A fair work environment is where
everyone can grow, be promoted, and become
successful in their own way.

How to Implement Good Business Ethics

Fostering an environment of ethical behavior and
decision-making takes time and effort—it always
starts at the top. Most companies need to create a
code of conduct/ethics, guiding principles, reporting
procedures, and training programs to enforce ethical
behavior.

Once conduct is defined and programs

implemented, continuous communication with
employees becomes vital. Leaders should constantly
encourage employees to report concern behavior—
additionally, there should be assurances that if
whistle-blowers will not face adversarial actions.

Tip: A pipeline for anonymous reporting

can help businesses identify questionable
practices and reassure employees that
they will not face any consequences for
reporting an issue.

Monitoring and Reporting Unethical

Behavior
When preventing unethical behavior and repairing
its adverse side effects, companies often look to
managers and employees to report any incidences
they observe or experience. However, barriers within
the company culture (such as fear of retaliation for
reporting misconduct) can prevent this from
happening.

Published by the Ethics & Compliance Initiative (ECI),

the Global Business Ethics Survey of 2021 surveyed
over 14,000 employees in 10 countries about
different types of misconduct they observed in the
workplace. 49% of the employees surveyed said they
had observed misconduct and 22% said they had
observed behavior they would categorize as abusive.
86% of employees said they reported the
misconduct they observed. When questioned if they
had experienced retaliation for reporting, 79% said
they had been retaliated against. [2] [3]

Indeed, fear of retaliation is one of the primary

reasons employees cite for not reporting unethical
behavior in the workplace. ECI says companies
should work toward improving their corporate
culture by reinforcing the idea that reporting
suspected misconduct is beneficial to the company.
Additionally, they should acknowledge and reward
the employee's courage in making the report.

What Is Business Ethics?

Business ethics concerns ethical dilemmas or
controversial issues faced by a company. Often,
business ethics involve a system of practices and
procedures that help build trust with the consumer.
On one level, some business ethics are embedded in
the law, such as minimum wages, insider trading
restrictions, and environmental regulations. On
another, business ethics can be influenced by
management behavior, with wide-ranging effects
across the company.

What Are Business Ethics and Example?

Business ethics guide executives, managers, and
employees in their daily actions and decision-
making. For example, consider a company that has
decided to dump chemical waste that it cannot
afford to dispose of properly on a vacant lot it has
purchased in the local community. This action has
legal, environmental, and social repercussions that
can damage a company beyond repair.

What Are the 12 Ethical Principles?

Business ethics is an evolving topic. Generally, there
are about 12 ethical principles: honesty, fairness,
leadership, integrity, compassion, respect,
responsibility, loyalty, law-abiding, transparency,
and environmental concerns.

The Bottom Line

Business ethics concerns employees, customers,
society, the environment, shareholders, and
stakeholders. Therefore, every business should
develop ethical models and practices that guide
employees in their actions and ensure they prioritize
the interests and welfare of those the company
serves.

Doing so not only increases revenues and profits, it

creates a positive work environment and builds trust
with consumers and business partners.

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