Lesson 2 Business Ethics

---

Introduction to Business Ethics

The past few years have witnessed incredible, widespread, and monetarily overwhelming examples of business misconduct in the American business community. These failures in basic ethics, moreover, have unhappily coincided with widespread objections to our American culture being voiced by many people around the world. What may have developed in American business is basic greed and arrogance.

The concept of self-regulation as a technique for achieving a more desirable role for business in society is the expected outcome of business ethics. Students often do not recognize the relationship between the free market, ethics, and the law. Therefore, the law is probably most accurately regarded as a last resort after the market and self-regulation (ethics) have demonstrably failed. Therefore, ethics is not to be addressed in the abstract or as an afterthought. Rather, it should be at the start of all business practices.

Businesses organized in the United States are subject to its laws as well as the laws of other countries in which they operate. Business persons owe a duty to act ethically in the conduct of their affairs and owe a social responsibility not to harm society.

Ethics is considered to be a set of moral principles or values that governs the conduct of an individual or a group. What is considered to be lawful conduct is not always ethical conduct; in other words, the law may permit something that would be ethically wrong.

This lesson will describe the moral theories of ethics and the social responsibility the business has to its shareholders, corporate entity, and employees.

 

Moral Theories

What is considered ethical by one party may be considered unethical by another. Some universal rules may govern our behavior or thought process when dealing with our business conduct. These theories help to create a base or foundation for our business behavior and the results of action by those members within the businesses that make decisions.

To begin, ethical fundamentalism occurs when a person who has the authority to make decisions in the business looks to an outside source for ethical rules or commands. This source may be a person, book, or teaching that molds the conduct of the parties involved. Ethical fundamentalism does not permit people to determine right and wrong for themselves but uses those teachings or principles of another to govern our decision process. Utilitarianism is a moral theory that dictates that people must choose the action or follow the rule that provides the greatest good to society. The theory does not mean the greatest good for the greatest number of people. In a business context, that greater good may be for the good of the company and not those affected by the decision.

Kantian Ethics (Duty Ethics) has been based on the moral theory that says people owe moral duties that are based on universal rules. This is based on the premise that people can use reasoning to reach ethical decisions. This reasoning allows business to act as others may act toward them and will make decisions based on positive outcomes. Rawls's Social Justice Theory is based on a social contract where each person is presumed to have entered into a social contract, with all others in society, to obey moral rules that are necessary for people to live in peace and harmony. Fairness is considered the essence of justice. And Ethical Relativism is a moral theory that holds that individuals must decide what is ethical based on their own feelings as to what is right or wrong. There are no universal ethical rules to guide a person's conduct. As such, if a person meets his or her own moral standard in making a decision, no one can criticize him or her for it.

 

The Social Responsibility of Business

Since a business does not operate in a vacuum, decisions made by business have far-reaching effects on society. In the past, many business decisions were made solely on a cost-benefit analysis with the concept of the bottom line being most important. A theory of social responsibility says that a corporation has a duty to take actions that maximize profits for shareholders. The interests of other constituencies are not important in and of themselves. Such decisions may cause negative externalities for others. Therefore businesses are considered to owe some degree of social responsibility for their actions.

Within the degree of social responsibility, a business should exhibit a moral minimum or a social responsibility that says a corporation's duty is to make a profit while avoiding harm to others. As long as business avoids or corrects the social injury it causes, it has met its duty of social responsibility. The legislative and judicial branches of government have established laws that enforce the moral minimum of social responsibility on corporations. Some of the concepts covered later in this course include and are not limited to occupational safety laws and consumer protection laws for product safety.

Business must also consider the effects its actions have on persons other than its owners, stakeholders, or stockholders. A business has a responsibility to do good and is responsible for helping to solve social problems. As such businesses owe a duty to promote the same social goals as do individual members of society.

To enable an ethical culture within the business, a social audit can be helpful to assess its behavior and influence on society. This audit should be extended to include the moral health of the business. In this way a social audit will be more apt to prevent unethical and illegal conduct by managers, employees, and agents. The audit could examine how well employees have adhered to the company's code of ethics, and if the company has met its duty of social responsibility. This method could promote employment opportunities for members of protected classes, increase worker safety, and include a section on environmental protection and consumer protection.

 

Ethical Benchmarks

As you can see, ethical business behavior is critical to the success of an enterprise. An ethics checklist can be created to enable management to make the correct business decisions. Management should first gather all pertinent facts and decide on critical issues. It is derived from these facts and issues that a set of alternatives can be determined that would satisfy the stakeholders. Within the alternatives, questions about legality, consequences, and public relations should be determined. The alternatives should not violate company values of self respect and responsibility. If the alternative violates values, determine which values are most important and choose the alternative that is most consistent with your values.

In creating an ethical workplace, management must set the tone for its employees and stakeholders. As such, management must not tolerate unethical behavior and should set the example for others within the firm. One method management may choose to set the correct and ethical way of doing business is to set policies and procedures that guide correct and fundamentally sound behavior. Companies may decide on a code of conduct that benefits the welfare of the employees, customers and suppliers. By acknowledging the interests of these types of groups, the goal of profit maximization could be achieved. In addition, firms should provide training to employees concerning ethical decision-making processes. The training will help to openly discuss ethical problems and to provide a benchmark for employee behavior. Corporate compliance programs should be set up to monitor compliance with recently enacted law.

In 2002, amid the scandals at WorldCom and Enron, the Sarbanes-Oxley Act was enacted. The act is a United States federal law passed in response to a number of major corporate and accounting scandals involving prominent companies in the United States. These scandals resulted in a decline of public trust in accounting and reporting practices. The legislation is wide ranging and establishes new or enhanced standards for all public U.S. company boards, management, and public accounting firms. The first and most important part of the act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The act also covers issues such as auditor independence, corporate governance, and enhanced financial disclosure. See: http://www.sarbanes-oxley.com/

Due to the act, many corporate entities developed corporate governance rules which established the rights and responsibilities of a corporation's management. To be effective, compliance should be integrated within the firm and monitored by a separate committee.

Ethical problems do arise when decisions are made with underlying trade-offs or conflict. Management may decide on a course of action that satisfies owners and shareholders but the decision may adversely affect other stakeholders.

Example:
GGH must reduce costs to stay competitive in the market. Management has found two alternatives to the solution. One would be to reduce the upper management through attrition and restructuring, the other would be company-wide lay-offs. Would it be better to trim the executive force or to lay off employees?

Neither decision would necessarily be unethical, but it's a question of which interest group—those employees who have been faithful for years, or upper management—should take priority in the decision. One of the best ways to learn about ethical behavior might be to learn from the behavior of other firms.

 

Ethics and the Law; Lesson Assignment Directions

As shown in Lesson 1, businesses operate within an extensive governance of the law. Planned actions by management must adhere to standards and current legislation enacted to protect stakeholders. Ignorance of the law is not tolerated, and as such the business must be aware of regulations that govern its conduct. Although they are so-called grey areas of legal interpretation, the courts expect decisions to be made as reasonably and ethically sound as possible within the framework of the law.

Lesson Assignment Directions

For each of the lessons in the course, you are expected to prepare a 500-750 word document that will present a considered response to the topic. It is expected that you research the topic before arriving at a conclusion. Each of the lesson assignments should be completed in a Word document and sent to the instructor by using the Angel drop box for that lesson.