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Chapter 1

The Importance of Business Ethics


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Why differentiate between rules/policies/law & ethics?


The difference between an ordinary decision and an ethical one is the point where rules no longer serve. Values and judgment play a key role in ethics decisions. Employees need a buffer zone of expected ethical behavior.

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Business ethics...
comprises principles and standards that guide behavior in the world of business. Whether a specific behavior is ethical or unethical is often determined by stakeholders:
investors employees customers interest groups the legal system the community
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Social responsibility is the obligation a business assumes to maximize its positive effect while minimizing its negative effect on society. Social responsibility consists of the following responsibilities:
economic (satisfy investors) legal (obey the law) ethical (expected activities & behaviors) philanthropic (desired activities & behaviors)
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Ethics & social responsibility have distinct meanings...

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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 FSGO and stakeholder demands for ethics initiatives. Individual ethics is not enough. Studying business ethics helps identify ethical issues to key stakeholders.
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Ethical Issues on the Rise...


Increased awareness of:
accounting fraud insider trading of stocks and bonds falsifying of organizational documents deceptive advertising defective products bribery employee theft
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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. (Also, the Protestant work ethic encouraged frugality and hard work.)

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The 1960s: The Rise of Social Issues in Business...


Societal social consciousness emerged
as well as an anti-business sentiment

JFKs Consumer Bill of Rights ushered in a 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
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The 1970s: Business Ethics as an Emerging Field...


Business professors began to write about social responsibility. Philosophers became involved in business ethics. Businesses became more concerned with their public image and addressed ethics more directly. Conferences were held and centers developed. Issues:
bribery, deceptive advertising, price collusion, product safety, and the environment
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The 1980s: Consolidation


Membership in business ethics organizations increased. Ethics centers provided:
publications, courses, conferences and seminars

Firms established ethics committees. Defense Industry Initiatives emerged and became the foundation for the Federal Sentencing Guidelines for Organizations
corporate support for ethical conduct
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The 1990s: Institutionalization of Business Ethics...


The Federal Sentencing Guidelines for Organizations set the tone for ethical compliance. These took preventative actions against misconduct; a company could avoid or minimize the potential penalties.

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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
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The Federal Sentencing Guidelines for Organizations...

The 21st Century: A New Focus


A move from legally based ethics initiatives to culturally or integrity based programs
although, legislation such as the Sarbanes-Oxley Act was passed to address the lack of confidence in financial reporting and corporate ethics

Realization that business ethics programs are good for business Businesses working more closely together, globally, to establish standards of acceptable behavior Copyright Houghton Mifflin Company. All rights reserved. 1-13

Customers, employees, and investors are major concerns for firms that want to develop loyalty and competitive advantage.

Relationship of Business Ethics to Performance

Goals are to increase customer dependence on the company and to provide products in an environment of mutual respect and perceived fairness. This focus creates satisfying relationships with employees. It also supports relationships with investors based on trust, dependability, and commitment.
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Ethics Contributes to Employee Commitment


Employee commitment comes from employees who believe their future is tied to that of the organization and their willingness 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.
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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 a platform for:
efficiency productivity profitability
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Consumers respond positively to socially concerned businesses.


Being good can be extremely profitable.

Ethics Contributes to Customer Satisfaction

Customer satisfaction dictates business success. A strong organizational ethical climate often places the customers interests first. Research shows a strong relationship between ethical behavior and customer satisfaction.
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Ethics Contributes to Profits


Corporate concern for ethical conduct is increasingly being integrated with strategic planning to maximize profitability. Corporate citizenship is positively associated with:
return on investment and assets sales growth

Many studies have found a positive relationship between citizenship and performance.
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