CHAPTER 1

The Importance of Business Ethics

Why Study Business Ethics?

Business decisions under great scrutiny Global financial crisis created diminished stakeholder trust Deals with questions about whether practices are acceptable No universally-accepted approach for resolving issues
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Business Ethics
Comprises principles, values, and standards that guide behavior in the world of business Principles: Specific boundaries for behavior that are universal and absolute Freedom of speech, civil liberties Values: Used to develop socially enforced norms Integrity, accountability, trust

Americans Trust in Business (% of respondents who say they trust the following business categories a great deal)

A Crisis in Business Ethics

Consumer trust of businesses is declining No sector is exempt from ethical misconduct Stakeholders determine what is ethical/unethical Investors Employees Customers Interest groups Legal system Community
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Why Study Business Ethics?

Reports of unethical behavior are on the rise Societys evaluation of right or wrong affects its ability to achieve its business goals Studying business ethics is a response to Sarbanes-Oxley, FSGO, and stakeholder demands for ethics initiatives Individual ethics alone is not sufficient Studying business ethics helps identify ethical issues to key stakeholders

A Timeline of Ethical and Socially Responsible Concerns

Before 1960: Ethics in Business

Theological discussions of ethics emerged Catholic social ethics included a concern for morality in business, workers rights and living wages Protestants developed ethics courses in their seminaries and schools of theology The Protestant work ethic encouraged hard work

The 1960s: The Rise of Social Issues in Business

Societal social consciousness emerged Anti-business sentiment rose JFKs Consumer Bill of RightsA new era of consumerism Right to safety, to be informed, to choose, and to be heard Consumer protection groups fought for consumer protection legislation Ralph Nader Source: Hisham Ibrahim

The 1970s: Business Ethics as an Emerging Field

Business professors began to write about social responsibility An organizations obligation to maximize positive impact and minimize negative impact on stakeholders Philosophers became involved Businesses became concerned with public image Conferences were held and centers developed Issues: Bribery Product safety Deceptive advertising Environment Price collusion

The 1980s: Consolidation

Membership in business ethics organizations increased Ethics centers provided: Publications, courses, conferences and seminars Firms established ethics committees Defense Industry Initiative on Business Ethics and Conduct (DII) emerged Foundation for the Federal Sentencing Guidelines for Organizations Corporate support for ethics

The 1990s: Institutionalization of Business Ethics

The Federal Sentencing Guidelines for Organizations (FSGO) Set tone for compliance Preventative actions against misconduct A company could avoid/minimize potential penalties

The Federal Sentencing Guidelines for Organizations

Standards and procedures capable of detecting and preventing misconduct High level oversight Care in delegation of authority Effective communication (training) Systems to monitor, audit, and report misconduct Consistent enforcement Continuous improvement

The 21st Century: A New Focus

Continued issues with corporate non-compliance
Growing public/political demand for improved ethical standards

Sarbanes-Oxley Act (2002)

Most extensive ethics reform Increased accounting regulations

FSGO reform (2004)

Requires governing authorities to be well-informed regarding business ethics programs

Firms greatest danger is not discovering misconduct early Basic assumptions of capitalism being debated
Fears in the wake of global recession and financial meltdown

Organizational and Global Ethical Culture

Ethical culture describes the component of corporate culture that captures the values and norms that an organization defines as appropriate conduct Creates shared values Goal is to: Minimize need for enforced compliance Maximize utilization of principles/ ethical reasoning
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Prevalence of Misconduct by Industry

Ethics Contributes to Employee Commitment

Comes from employees who believe their future is tied to the organizations Are willing to make personal sacrifices for the organization
The more dedication on the part of the company, the greater the employee dedication Concerns include a safe work environment, competitive salaries and benefit packages, and fulfillment of contractual obligations

Ethics Contributes to Investor Loyalty

Companies perceived by their employees as having a high level of honesty and integrity are more profitable than companies with a low level of honesty and integrity Ethical climates in organizations provide platform for:
Efficiency Productivity Profitability

Ethics Contributes to Customer Satisfaction

Consumers respond positively to socially concerned businesses Being good can be extremely profitable Customer satisfaction dictates business success A strong organizational ethical climate places customers interests first Research shows a strong relationship between ethical behavior and customer satisfaction

Ethics Contributes to Profits

Corporate concern for ethical conduct is being integrated with strategic planning Maximize profitability Corporate citizenship is positively associated with: Return on investment and assets Sales growth Studies have found a positive relationship between citizenship and performance

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