Introduction of Business Ethics

By

Dr. Farrukh Naveed

Asst Prof finance (Riphah International University Faisalabad)
 Some basic terms
• The terms morals, principles, values, and ethics are often used interchangeably.
However, these are different
• 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 are your philosophies or sets of values of right and wrong, relate to you
and you alone. You may use your personal moral convictions in making ethical
decisions in any context.
• Morality refers to the rules and guidelines which an individual or a group has
about what is right/wrong, good or evil, true or false.
• Values: These 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.

• Ethics: Ethics is a mass of moral principles or set of values about

what is right or wrong, true or false, fair or unfair, proper or improper
what is right is ethical and what is wrong is unethical.
 Business Ethics
• Business ethics is a specialized study of moral right and wrong that
focuses on business institutions, organizations, and activities. Business
ethics is a study of moral standards and how these apply to the social
systems and organizations through which modern societies produce
and distribute goods and services, and to the activities of the people
who work within these organizations.
 Objectives of Ethics

The objectives of ethics are as below:

• 1. The very basic objective is to define the greatest good of man and
establish a standard for the same.
• 2. Set/Establish moral standards/norms of behavior.
• 3. An overall study of human behavior: what is moral or immoral should be
assessed.
• 4. Apply judgment upon human behavior based on these standard and
norms.
• 5. Suggest moral behavior, Prescribes recommendations about Do’s and
Don’ts.
• 6. One’s opinion or attitude about human conduct is expressed in general.
Why study business ethics?
 Ethical characteristics of the Business
1. Core Value Statement
• An ethical business has a core value statement that describes its mission.
Any business can create a value statement, but an ethical business lives
by it. It communicates this mission to every employee within the
structure and ensures that it is followed. The ethical business will
institute a code of conduct that supports its mission. This code of
conduct is the guideline for each employee to follow as he carries out
the company's mission.

• 2. HONESTY. Ethical executives are honest and truthful in all their

dealings and they do not deliberately mislead or deceive others by
misrepresentations, overstatements, partial truths, selective omissions, or
any other means.
3. Integrity and Fairness
• Integrity is an all-encompassing characteristic of an ethical business. The
ethical business adheres to laws and regulations at the local, state and federal
levels. It treats its employees fairly, communicating with them honestly and
openly. It demonstrates fair dealings with customers and vendors including
competitive pricing, timely payments and the highest quality standards in the
manufacture of its products.

4Respect for Employees and Customers

• Ethics and respect go hand in hand. An ethical business demonstrates respect for its
employees by valuing opinions and treating each employee as an equal. The business
shows respect for its customers by listening to feedback and assessing needs.
• An ethical business respects its vendors, paying on time and utilizing fair buying
practices. And an ethical business respects its community by being environmentally
responsible, showing concern and giving back as it sees fit.
 5Concern for People and Environment
• An ethical business has concern for anyone and anything impacted by
the business. This includes customers, employees, vendors and the
public. Every decision made by the business is based on the effect it
may have on any one of these groups of people, or the environment
surrounding it
6Loyalty.
• Ethical executives are worthy of trust, demonstrate loyalty to persons
and institutions by friendship in adversity, support and devotion to
duty; they do not use or disclose information learned in confidence for
personal advantage. Loyal relationships are mutually beneficial and
both parties reap benefits. Employees who work for a loyal employer
want to maintain the relationship and will work harder toward that end.
7. Law Abiding
• Ethical executives abide by laws, rules and regulations relating to their
business activities
• 8. Commitment to Quality
Ethical organizations show their concern for improving the quality of the
product or services. These organization do not compromise on quality and
try to work according to the quality standards issued by the various bodies.
Ethical businesses are committed to providing high-quality products and
services. This commitment means meeting or exceeding customer
expectations, ensuring product safety, and continuously improving
business processes.
A commitment to quality enhances customer satisfaction and loyalty. It
differentiates the business in the competitive market and leads to positive
word-of-mouth and repeat business.
• 9. Accountability
Accountability involves taking responsibility for one’s actions and
decisions. Ethical businesses are accountable to their stakeholders and
accept the consequences of their actions. They have clear policies and
procedures to ensure that responsibilities are defined and adhered to.
Accountability builds trust and reliability. When businesses are
accountable, they can quickly address and rectify mistakes, maintaining
stakeholder confidence and trust.
 Ethical issues faced by the organizations
• Discrimination
• Misuse of company resources, powers, and authority
• Abusive behavior
• Harassment
• Accounting fraud
• Nepotism and Favoritism
• Conflicts of interest
• Defective products
• Bribery
• Health and safety
• Employee theft
• Environmental issues
• Not giving value to the community or society
• Inside Trading
 Examples
• For example, Chesapeake Energy received negative publicity after it
was revealed that CEO Aubrey McClendon had the unique perk of
acquiring a small stake in every oil well that Chesapeake drilled.
However, to pay for the costs, McClendon secured loans from firms,
some of which were investors in Chesapeake. This represented a
massive conflict of interest, and resulting criticism caused Chesapeake
to eliminate the perk. McClendon was later forced to resign.
• One of the most famous examples is the 2001 scandal that enveloped
American energy company Enron, which for years inaccurately
reported its financial statements and its auditor, accounting firm Arthur
Andersen, signed off on the statements despite them being incorrect.
When the truth emerged, both companies went out of business,
Enron’s shareholders lost $25 billion, and although the former “Big
Five” accounting firm had a small portion of its employees working
with Enron, the firm’s closure resulted in 85,000 jobs lost
Examples of misuse may come in an obvious form, like manipulating
numbers in a report or spending company money on inappropriate
activities; however, it can also occur more subtly, in the form of
bullying, accepting inappropriate gifts from suppliers, or asking you to
skip a standard procedure just once. With studies indicating that
managers are responsible for 60% of workplace misconduct, the abuse
of leadership authority is an unfortunate reality.
 Ethical Risk
• The concept of Ethical Risk refers to unexpected
negative consequences of unethical actions.
 How to Avoid Ethical Issues and control
Ethical risk

1. Create a code of conduct

• A written code of conduct provides employees and managers with an
overview of the type of conduct and behaviors the company expects. It
outlines what behaviors are unacceptable and what measures are taken
if an employee violates the code of conduct.
• Establish a Strong Ethical Culture
• Leadership Example: Leaders should model ethical
behavior, as employees often emulate the actions of top
management.
• Core Values: Define and communicate clear organizational
values that emphasize ethical conduct.
• Open Communication: Encourage open discussions about
ethical dilemmas without fear of retaliation.
• Implement a Whistleblowing Policy
• Anonymous Reporting: Set up a system where employees
can report unethical behavior anonymously.
• Protect Whistleblowers: Ensure that employees who report
unethical behavior are protected from retaliation.
• Clear Process: Make the reporting process easy and
transparent.
2. Reinforce Consequences for Unethical Behavior
• Business owners must hold their employees accountable when they act
unethically. Start by informing new employees of the rules during their
orientation sessions. Make sure all new workers know the
consequences of policy violations. If an employee acts unethically,
refer to the code of conduct and take the necessary measures to warn
or terminate.
 3. Promote your values and lead by example
• Most organizations have a list of values with the words “honesty”,
“integrity”, or “accountability”. It’s good to have these written down,
but the words are meaningless if the policies are not followed: you
must do more than using words in the company description.
• Make sure that leadership behavior supports the organization’s values
—workers will be more likely to follow them if they know they are
expected to and they have someone to model their behavior after. An
unethical boss is not likely to inspire ethical employees.
 4. Provide ethical training
• Employees cannot always be blamed for an unethical action. Not everyone
has the same sense of “right” and “wrong”, so they should be instructed at
the beginning of employment what behaviors are unacceptable.
• Some actions may be unethical, but those more subtle or specific to your
organization should be explored so employees can recognize when they
are in a risky situation. Employees must also be trained on how to avoid
the unethical behavior and what course of action they should take instead.
• Another important part of training is ensuring that employees understand
the consequences of their actions. It is easier to act in an unethical fashion
if you don’t think of all the people it could impact. Instruct employees on
how these behaviours can hurt not only themselves, but their coworkers,
the business, or your customers.
 5. Implement a system for reporting unethical behavior
• If an employee knows or suspects that someone within their
organization is behaving unethically, they must have a way to report it.
• It’s important to keep in mind that many people would not be
comfortable just going to their manager – perhaps it is a superior
performing the action, previous reports have been ignored, or the
employee fears that the wrong-doer will discover who reported them.
• For these reasons, every organization should implement an anonymous
reporting system. Ideally, an external third party should manage this
system so employees will feel comfortable reporting specific incident
details.
• Ethical risk management is nearly impossible without this, as even
regularly occurring incidents may not be reported.
 6. Use your organization's structure to deter unethical activities
• People typically behave in unacceptable ways when they feel they will
not be discovered or held responsible. Under-managed teams, remote
locations, or individuals whose work is never questioned are excellent
places for unethical behaviours to develop.
• Ensure that appropriate management and checking systems are in
place to deter employees from believing an unethical action will go
unnoticed.
• Conduct Regular Audits and Risk Assessments
• Ethical Risk Audits: Regularly assess areas of the
organization where ethical risks are most likely to arise, such
as financial dealings, compliance, and vendor relations.
• Internal Audits: Conduct internal audits to ensure policies
are being followed and ethical standards are met.
• Third-Party Audits: Engage external auditors to review
business processes for ethical compliance.
• Monitor and Manage Conflicts of Interest
• Disclosure Policies: Require employees to disclose any
potential conflicts of interest, such as personal relationships
with vendors or clients.
• Managing Conflicts: Create processes to manage and
resolve conflicts of interest to ensure they do not influence
business decisions.
• Foster a Diverse and Inclusive Work Environment
• Equal Treatment: Promote a culture of fairness, where everyone is
treated with respect and dignity.
7. Create Checks and Balances
• Rather than putting related responsibilities in the hands of one
employee, create a system of checks and balances to minimize the
opportunities for unethical behavior. For example, a sales associate
rings up customer purchases, while an accountant balances the books
to ensure that all payables are received and documented. Use an
annual audit to verify established procedures are being followed and
develop new policies to address any unique situations that arise during
the year.
 8. Respond
• It is important to follow through on every spot check and report to
quickly determine when unethical actions are occurring in your
organization. When they are discovered, respond efficiently and fairly.
• Don’t publicly berate the employee; if details of the incident must be
shared, keep it professional and use it as an example for the
organization to learn from in the future.
• Must take necessary action when an unethical behavior is reported
otherwise the ethical risk management will not work properly if you
left the matter unresolved.
 Ethical Culture

• 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.
• 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 top management.
The benefits of studying business ethics / The role of ethics
in performance
• 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. 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.
• 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.
• Employees’ perceptions that their firm has an ethical culture lead to performance
enhancing outcomes within the organization.
• 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.

• 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.
• Ethics Contributes to Investor’s Loyalty
• Ethical conduct results in shareholder loyalty. Investors today are
increasingly concerned about the ethics and social responsibility that
creates the reputation of companies in which they invest.
• 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.
• 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, they generally avoid to invest in the firm, which is
involved in any unethical practice.
• 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 products to
keep pace with customers’ changing desires and preferences, it must also develop long term
relationships with its customers and stakeholders.
• High level of perceived corporate misconduct decreases customer trust. On the other hand,
companies viewed as socially responsible increase customer trust and satisfaction.
• Due to the misconduct and unethical behavior the customer becomes unsatisfied. 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.
• The perceived ethicality of a firm is positively related to brand trust, emotional identification
with the brand, and brand loyalty. The brand loyalty thus contributes to the profitability.
• 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 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
• Ample evidence shows being ethical pays off with better performance.
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. Thus the ethical behavior in the business
increases the profitability.
RESOLVING ETHICAL BUSINESS CHALLENGES (Case Study)
(Referred to book)