CHAPTER 1

ETHICS: FOUNDATIONS

1.1 INTRODUCTION
This unit aims at creating a basic understanding of the meaning of the term “ethics”. What constitute good ethical
behaviour has never been clearly defined. And in recent years, the line differentiating right from wrong has become
even more blurred. Employees see people all round them engaging in unethical practices – elected officials are
indicted for padding their expense accounts or taking bribes, successful executives use insider information for
personal financial gain; soccer administrators “look the other way” when a winning coach verbally abuses his
athletes; etc.

1.2 THE NEED FOR BUSINESS ETHICS

The need for business ethics has increased over the years due to the following influences:
• Corporate greed, fraud, illegalities, etc
• Corporate scandals resulting in bankruptcy – Enron, Arthur Anderson, WorldCom, Global Crossing, etc
• In spite of existence of watchdogs – BODs, Auditors, Financial Analysts, Govt Regulators – there was
failure to conduct the oversight function
• The global financial crisis
• Business is the most powerful and influential institutions in human history. Decisions made affect nearly
every aspect of contemporary life.
• Almost half of waking hours are spent in the workplace.
• What we eat, where we leave, if and how we work, how we are governed, how we spend our leisure time,
and how much access we have to education and healthcare are all strongly influenced by what happens in
business.
• It is crucial therefore that we think carefully about the ethical status of business.
• Businesses are human institutions that humans have created.
• Therefore we are responsible for the existence and structure of business institutions and must acknowledge
that responsibility by monitoring the ethical dimensions of business activities.

Important questions
• What is the appropriate role of business in society?
• How should business institutions be structured to ensure that they are consistent with the fundamental
values of society?
• What responsibilities do businesses have to the society in which they operate? To their employees? To the
consumers of the goods and services they provide?
• Conversely, what responsibilities does a society have to business owners and managers?

Range of people harmed by the scandals

• The individuals themselves and their families
• The employees – tens of thousands lost their jobs
• Consumers who relied on the services and products of these firms
• Investors – billions of dollars were lost, investor confidence in financial markets was undermined.
• The general public – loss of state revenue

Importance of Ethics for an Accounting/Finance Professional

• Would you entrust your money to someone you thought was unethical?
 • Would you risk heavy fines and possible jail time for skimming funds from a client?
• Responsibility to “act in the public interest”
• While acting in public interest, it becomes imperative that the finance and accounting professional adheres
to certain basic ethics in order to achieve his objective.
• People who work in finance/accounting are placed with a fiduciary position of trust.

Benefits of Designing and Implementing Business Ethics Programme

• Enhanced reputation and goodwill
• Reduced risks and costs
• Protection from own employees and agents
• Stronger competitive positions
• Expanded access to capital, credit, and foreign investment
• Increased profits
• Sustained long term growth
• International respect for enterprises and emerging markets.

Case for ethics

In the light of the above scandals and benefits, the case for the centrality of ethics would be made – making a course
in business ethics central to curricula of managerial accounting, finance, banking, marketing, human resource, etc

1.3 THE MEANING OF ETHICS

 The term “ethics”, describe the discipline dealing with what is good and bad, or right or wrong, or with
moral duty and obligation (Mondy, Sharplin and Premeaux (1990:61).
 According to Robbins and Coulter (1998: 158), ethics are the rules and principles that define right or wrong
conduct”.
 When applied to business, ethics favour honesty, telling the truth, respect for the law, and operation of
business in accordance with policies that are fair and just to society.
 The term is closely, but not identical to, social responsibility. Social responsibility is the implied, enforced,
or felt obligation of managers, acting in their official capacities, to serve or protect the interest of groups
other than themselves.

In order to gain greater appreciation of the difficulties involved when considering ethics, and ethical dilemma is
presented in the box.

Activity
Suppose for a moment that you have a goal that is critically important to you. Your friends are very supportive and are determined to assist you in
the accomplishment of your goal. You later attain your goal, and find out still later that your friends did some illegal things they believed would
help you reach your goal. You just found out about their activities. Although their illegal activities did not help you attain your goal, your
friends thought it might. No one was hurt by your friends’ illegal activities, but they did break the law. You have two options: you can cover for
your friends in and allow them to suffer the consequences of their actions. What do you suggest?

Let’s further assume that you were the President of the United States, Richard M Nixon, and your friends are the Watergate burglars. What
would you have done?

Give an account of ethical dilemmas that you have experienced in your company.

1.3.1 What are Ethical Dilemmas?

 Ethical dilemmas are situations in which individuals are required to define right and wrong conduct.
  Situations in which there is no obvious “right’ or “wrong” decision, but rather a “right” or “right” answer.
 The decision you make requires you to make a right choice knowing full well that you are:
o Leaving an equally right choice undone
o Likely to suffer something bad as a result of that choice
o Contradicting a personal ethical principle in making that choice.t
o Abandoning an ethical value of the community or society in making that choice.
 For example, should they “blow the whistle” if they uncover illegal activities taking place in their
company? Should they follow orders with which they don’t personally agree? Do they give an inflated
performance evaluation to an employee whom they like, knowing that such an evaluation could save that
employee’s job? Do they allow themselves to “play politics” in the organization if it will help their career
advancement?

Five Ethical Decisions: What Would You Do?

Assume you’re a middle manager in a company with about a thousand employees. How would you respond to each of the following situations?
1. You’re negotiating a contract with a potentially very large customer whose representative has hinted that you could almost certainly be
assured of getting his business if you gave him and his wife an all-expense-paid cruise to the Caribbean. You know the representative’s
employer wouldn’t approve of such a “payoff” but you have the discretion to authorize such expenditure. What would you do?
2. You have the opportunity to steal US$100 000 from your company with absolute certainty that you would not be detected or caught.
Would you do it?
3. Your company policy on reimbursement for meals while traveling on company business is that you will be repaid for your out-of-pocket
costs, not to exceed $60m a day. You don’t need receipts for these expenses – the company will take your word. When traveling you tend
to eat at fast-food places and rarely spend in excess of $15m a day. Most of your colleagues put in reimbursement requests in the range of
$45m to $50m a day regardless of what their actual expenses are. How would you request for your meal reimbursements?
4. Another executive, who is part of a small planning team in which you’re a member, frequently has the smell of alcohol on his breath.
You’ve noticed that his work hasn’t been up to standard lately and is hurting your team’s performance. This executive happens to be the
son-in-law of the company’s owner and is held in very high regard by the owner. What would you do?
5. You’ve discovered that one of your closest friends at work has stolen a large sum of money from the company. Would you: do nothing?
Go directly to an executive to report the incident before talking about it with the offender? Confront the individual before taking action?
Make contact with the individual with the goal of persuading that person to return the money.

1.4 ETHICS AND TRUST

 Many observers believe that organizations are suffering from lack of ethics and trustworthiness.
Behaviours that were once thought reprehensible – lying, cheating, misrepresenting, and covering up
mistakes – have become, in many people’s eyes, acceptable or even necessary practices. Even college
students seem to have become caught up in this wave.
 A Rutgers University Study of more than 6000 students found that, among those anticipating careers in
business, 76% admitted having cheated on at least one test and 19% acknowledged having cheated on few
or more tests (Tetzeli (1991:14). Table 1.1 shows the result of another survey of ethical issues to managers
and students. What would your responses have been?

Table 1.1 Truthfulness of Others

YES NO UNSURE
Have you ever cheated on an exam or assignment?
Undergraduate Business Students 29% 69% 2%
Graduate Business Students 53% 42% 5%
Is it OK to get around the law if you don’t actually break it?
 Inc Readers, Business Managers 27% 61% 12%
Undergraduate Business Students 23% 51% 26%
Graduate Business Students 37% 42% 21%
Do you always tell the truth?
Inc. Readers, Business Managers 15% 83% 2%
Undergraduate Business Students 17% 75% 8%
Graduate Business Students 32% 57% 11%
If you could get into a movie without paying and not get caught, would you do it?
Inc. Readers, Business Managers 29% 70% 1%
Undergraduate Business Students 60% 33% 7%
Graduate Business Students 43% 39% 18%

Concern over this perceived decline in ethical standards is being addressed at two levels. First, ethics education is
being widely expanded in college curriculums. For instance, the main accrediting agency for business schools now
requires all its members to integrate ethical issues throughout their business curriculum. Second, organizations
themselves are creating codes of ethics, introducing ethics training programs, and hiring ethics officers.

1.5 BUSINESS ETHICS AND THE LAW

• There is some overlap.
• The law is an institutionalisation or codification of ethics into specific social rules, regulations, and
proscriptions
• However, the two are not equivalent.
• The law define the minimum acceptable standards of behaviour.
• However, many morally contestable issues are not explicitly covered by the law, eg
– There is no law in many countries preventing businesses from testing their products on animals, or
preventing their employees from joining a union
• Similarly, there are some issues which are covered by law, but are not really about ethics. Eg.
– The law prescribes whether we should drive on the right or left side of the road. Although it
prevents chaos on the road, the decision about which side we should drive on is not an ethical one.
– Business ethics can be said to begin where the law ends.
– BE is primarily concerned with those issues not covered by the law, or where there is no definite
consensus on whether something is right or wrong.
– Discussion about the ethics of a particular business practice may eventually lead to legislation
once some kind of consensus is reached.
– Business ethics is said to be about the “grey areas” of business where values are in conflict. (Fig
1.1)
–
Fig 1.1 Relationship between ethics and the law

Ethics

Grey areas
 Law

1.6 BUSINESS ETHICS AND ITS COMPONENTS

The term “business ethics” refer to “the application of ethical principles to business relationships and activities”
(Mondy et al (1990: 94).
According to Desjardins and McCall (1990), there are three different ways in which the phrase “business ethics”
gets used:
 In the first instance, “business ethics” refers to the actual moves or rules of conduct that operate within
business. In this sense, “business ethics” is used descriptively to refer to the actual practices found in
business.
 In the second sense, “business ethics” is used prescriptively to outline how people in business ought or
should act. What is sometimes called normative ethics (to distinguish it from descriptive usage mentioned
above), typically appeals to some independent ethical standards that are used to evaluate the actual
practices of business. Thus, “business ethics” in this normative sense is used to judge as right or wrong,
good or bad, the actual “ethics” of business.
 Finally, “ethics” is sometimes used to refer to a branch of philosophy that systematically studies the many
questions concerning how humans ought to act and live. In this sense, “business ethics refer to the
philosophical study of both the mores and rules that are actually operating in business and the normative
standards that are used in evaluating these practices. According to Thomas (2005), business ethics is made
up of three main components:
 Ethical values
 A code of ethics, and
 Good corporate governance.

16.1 Values
 Various types of values exists
o Political values, such as democracy
o Economic values, such as equity
o Social values, like equal opportunity
o Ethical values, such as trust, honesty, truthfulness, and others. Unethical behaviour involves the
opposite: distrust, deception, lying, greed, and so on.
 Value system: a set of personal principles formalised into a code of behaviour.
o Intrinsic value: where a value is a good thing in itself and is pursued for its own sake, whether anything
good comes from that pursuit or not.
 o Instrumental value: where the pursuit of that value is a good way to reach another value. For example
money is valued for what it can buy rather than for itself.
1.6.2 Value conflict
 Values can be in direct conflict with an action – eg
o Lying is wrong – but what if you were lying to protect the life of a loved one?
o Stealing is wrong – but what if you were stealing food for a starving child?
 Think of other values that could be in direct conflict with an action.
 How do you resolve such conflicts?
 It is this gray area that makes the study of ethics so complex.
 In spite of existence of rules of right and wrong, some situations require exceptions to those rules.
 How you choose to respond to such situations define your personal value system.

1.6.3 The Golden Rule

 “Do unto others as you would have them do unto you”
 “Hurt not others in ways that you yourself would find hurtful” – Buddhism (Varga 5:18)
 “Therefore all things whatsoever would that men do should do to you, do ye even so to them.” -
Christianity (Mathew 7:12)
 “This is the sum of duty: do naught unto others which would cause you pain if done to you.” – Hinduism
(Mahabharata 5: 1517)

1.6.4 A Code of Ethics.

A Code of Ethics goes beyond separate values to become a set of principles that makes a clear statement of what the
business corporation is willing to do, or not to do, like forbidding staff to take bribes. Many different codes of ethics
or conduct now exist, ranging from those issued by international bodies, such as the Organisation for Economic Co-
operation and Development (OECD) Guides for Multinational Enterprises, to Individual Codes adopted by
different business corporation around the world.

1.6.5 Corporate Governance

Corporate Governance is the framework for the policies and procedures which govern the Board of Directors in a
business corporation, including non-executive directors and others who advise the Boards. Corporate governance is
an essential part of “Business Ethics” since the morality of the Board and its individual directors does, or should
underlie these policies and procedures. For example, the remuneration of directors should reflect the values of
“fairness” and “honesty”. (Unit 4)

1.7 SOME UNETHICAL PRACTICES IN BUSINESS

Deciding what is ethical is often difficult. Particularly ethical practices seldom make news, but unethical practices
tend to be reported widely. The following are examples of activities usually perceived as unethical:
 Corruption, which has been defined as “the misuse of public or corporate position or power for private gain”.
When a company bribes a government official or someone working in another company in order to obtain
business, he/she is considered to be involved in an unethical behaviour.
 Bribery is a form of corruption that is common among business people. Some companies justify bribery on the
grounds that it is part of the culture to “grease” the palms of those who will assist them to make things happen.
For example, giving a customs officer some cash in order to wave duty on some imported vehicle parts. Such
practices have some moral or practical consequences that can be summarized as follows:
- It increases the cost of doing business
- By its very nature, it is hidden, thus discouraging business transparency and accountability
- It demeans the participants and destroys trust.
 Business entertaining. Some people believe that high-profile and expensive entertaining at big sports events
are a way of building personal relationships with clients, or rewarding good customers for giving them business.
For example, in Japan, the use of geisha girls comes to mind, where young ladies entertain business executives.
In other countries, escort clubs provide businessmen with entertainment.
 Product policies. Copying and marketing of look-alike products is one of the typical ethical “gray areas”. And
so is product counterfeiting; where counterfeiters defraud brand owners of such products like Coca-cola,
Colgate toothpaste, or ‘Rolex’ watches with their poor-quality copies.
 Pricing policies of goods and services can sometimes lead to unethical behaviour. For example, double pricing
at the point of sale and in media advertising can sometimes mislead purchasers of goods and services.
 Purchasing. There are some aspects of commercial relationships that raise some important ethical questions.
For example, where the customer has excessive purchasing power in terms of volume and price, he/she is likely
to force down the price demanded by a small supplier.
 People. The treatment of employees at work, in the face of competition leaves a lot to be desired. Some are
overworked and lowly paid. Others end up with a lot of stress. Even during redundancies or ‘downsizing’
ethical questions arise on how those remaining are overworked. Another ethical question arise when business
leaders award themselves “excessive” pay at the expense of the majority of the workforce.
 Intelligence gathering and industrial espionage. The question of intelligence gathering and industrial
espionage may pause some ethical and moral dilemmas to those concerned. This may be in the form of bugging
offices of competitors, intercepting their mail or stealing their trade secrets; recruiting people from competitors;
and so on.
 Other forms of unethical business practices include:
- Falsifying information on an application blank
- Illegal insider trading on the stock market
- Padding expense accounts to obtain reimbursement for questionable business expenses
- Divulging confidential information or trade secrets
 - Availing oneself of company property or materials for personal use
- Giving or receiving gifts in return for favours
- Firing an employee for whistle-blowing
- Terminating employment without giving sufficient notice, either to the employee or to the
employer
- Stealing from the company
- Receiving or offering kickbacks

Reasons for unethical behaviour

 Emphasis on short term results – Enron and WorldCom
 Ignoring small unethical issues – small compromises lead to committing large infractions; ignoring minor
lapses, lead to bigger and more colossal mistakes
 Economic cycles – in good times, companies are slack in accounting procedures and disclosures. But when
times of hardship follow, the hit is almost fatal
 Accounting rules. In the era of globalisation and massive cross border flow of capital, accounting rules are
changing faster than ever before. The complexity of principles and rules and the difficulty associated with
identifying abuses are reasons which may promote unethical behaviour.

Activity
1. Give an account of an ethical dilemma that you are currently experiencing at your workplace, and explain how you resolved
it, indicating the type of conflict you experienced and the resolution principle you adopted.
2. Think of activities that you have witnessed that could be perceived as unethical.
3. Explain how the following activities are considered unethical: (a) insider trading (b) churning (c) wash sale (d) due
diligence.

1.9 MODEL OF ETHICS

A model of ethics is presented in Fig 1.2

Our beliefs about Our Actions Sources of

what is right or ethical
wrong guidance

Lead to Determine

Fig 1.2 – Model of Ethics

It can be seen that ethics consists mainly of two relationships, indicated by the horizontal arrows in the figure. A
person or organization is ethical if these relationships are strong and positive. There are a number of sources that
one might use to determine what is right or wrong, or good or bad, or moral or immoral behaviour. These include
the Bible, the Koran, and a number of other holy books. They also include that “still small voice” that many refer to
a conscience. Millions believe that conscience is a gift of God. Others see it as a developed response based on the
internalization of societal mores.

Another source of ethical guidance is the behaviour and advice of those whom psychologists call “significant
others” - our parents, friends, role models, and members of our churches, clubs and associations.

For organized professionals especially, there are often codes of ethics that prescribe behaviour any type of act
sufficiently hurtful to others is often prohibited by low. Thus, enacted laws offer guides to ethical behaviour. If a
certain behaviour is illegal, most would consider it to be unethical as well. There are exceptions, of course. [E.g.
laws that prohibit black people from using certain facilities during the apartheid era could be considered unethical].

Notice in Fig 1.2 that the sources of ethical guidance should lead appropriate beliefs or convictions about what is
right or wrong. Most would agree that persons have a responsibility to avail themselves of these sources of ethical
guidance. In short, individuals should care about what is right and wrong and not just be concerned with what is
expedient. The strength of the relationship between what an individual or an organization believes to be moral and
correct and what available sources of guidance suggest is morally correct is Type I ethics. For example, suppose a
student believes it is acceptable to copy another students’ exam paper, despite the fact that almost everyone
condemns this practice. This student is unethical, but only in a Type I sense.

Simply having strong beliefs about what is right and wrong and basing them on the proper sources does not make
one ethical. Fig 1.2 illustrates that behaviour should conform to what a person believes about right or wrong. Type
II ethics is the strength of the relationship between what one believes and how one behaves. Everyone would agree
that to do what one believes is wrong is unethical. For example, if a student knows that it is wrong to look on
another’s examination answer sheets but does so anyway, the student has been unethical in a Type II sense.
Generally, a person is not considered ethical unless he or she possess both types of ethics. If a business manager
knows that it is wrong to damage the environment yet dumps poisonous waste in a nearby stream, this behaviour is
unethical also.
BUSINESS ETHICS: THEORETICAL FRAMEWORK AND FUNDAMENTAL PRINCIPLES.

2.1 INTRODUCTION
It is important for us to see corporate ethics in the broader socio-historical context in which it occurs. For this reason
it is important to focus not just on the practical issues concerned, but also the ideological frameworks in which some
of our practices are embedded. It is also important to relate ethics to social and cultural chance so that we know how
to relate with those who may be operating from different worldviews.

2.2 VIEWS OF BUSINESS

2.2.1 Historical Overview
 Earliest societies, such as the ancient Egypt, old China, the Inca and the Aztec, were agrarian. No industry
or mass consumer markets existed, therefore business played a small part of life in general. In this setting,
merchants were viewed as indecent because of sharp trading practice and ethics clashed with altruistic
traditional values and clan relations. Merchants were typically given lower class than government officials,
farmers, solders, artisans and teachers. This is likely to have fueled the philosophical belief that wealth
from commercial activity was associated with greed and corruption, and as a result, people were cynical
about it.

 In ancient Greece, there was the idea that wealth was fixed; therefore one could only increase it at the
expense of others.

 Aristotle argued that retail activity for monetary gain, as opposed to simply acquiring necessary
commodity, is a “perverted or unsound activity.”

 Roman law forbade senatorial class to make business investments. The Roman church supported the notion
of a just price (a price charged which is adequate to sustain merchants in the social status into which they
were born) as opposed to a market price (supply and demand). Usury (lending of cash for interest) was
condemned. However, with the expansion of economic activity in the 12 th and 13th Century, interest-
bearing loans were commonplace.

 With the Renaissance new economic theories arose to justify business activities. Adam Smith’s theory
proposed that markets harnessed greed for the public good, and that competitive markets protected
 consumers from unfair prices. In this theory people started to understand that economies do grow, a break
away from the idea of a fixed amount of wealth. In the U.S., merchants were more easily embraced as
many of them were pilgrims, and known for their integrity, their business was reasonably small and private,
as opposed to the mistrust of the huge corporations, which developed in the 19th Century.

2.2.2 Recent Movements

Anti-Institution Movement (1960s) – included protests against established large corporations. There was a gap
between how businesses should perform and public perceptions of how they did.

Reformers – a group who not only perceive the legitimacy of the business system but the flaws in it as well. Several
tactics used by activists were: Shareholder resolutions, Boycotts and Selective purchasing and investment laws

Liberal Intellectuals – argue that human rights should be protected and enhanced; there is a need to restrain
corporate power; social arrangements can be improved through reform; and government should be used to correct
the problem in a country.

Marxists – argue that the faults of capitalism cannot be dealt with through gradual reform. The view here is that
free market institutions and private capital must be swept away. Capitalism is seen as creating worker exploitation,
imperialist expansion overseas, resource waste, racial and sexual discrimination, income inequality, militarism etc.
However this thinking has been waning as a result of the disintegration of Eastern governments.

The Market Economy Perspective – argues that, in a competitive economy, a corporation derives its legitimacy
from the simple fact that it offers consumers products attractive to them in terms of quality, service, variety, and
price. This generates a profit, ensuring the company’s existence over the long term and permitting it to develop as
required and to produce a return for investors (Maucher (1994:118).

2.3 GENERAL THEORIES OF ETHICS

The following theories have been used in discussions of ethics:
Absolutism Intuitionism Platonic ethics
Aristotelian Ethics Justice Prescriptivism
Conscience Just War Theory Prima Facie Ethics
Determinism Kantian Ethics Relativism
Egoism Libertarianism/Autonomy Religion and Morality
Emotivism: Ayer Naturalism Situation Ethics
Hobbes – State of Nature Natural Moral Law Subjectivism
Rights Theory Objectivism Utilitarianism
2.4 TRADITIONAL THEORIES OF BUSINESS ETHICS
2.4.1 Consequentialist vs non-consequentialist
 Generally offer a certain rule or principle which one can apply to any given situation – hence they are
absolutist in intention.
 They provide with a fairly unequivocal solution to ethical problems.
 Can be consequentialist or non-consequentialist (see fig 2.1)

Fig 2.1 Consequentialist and non-consequentialist theories in business ethics

Motivation/
Action Outcomes
Principles

Non-consequentialist ethics Consequentialist ethics

 Consequentialist theories base moral judgment on the outcomes of a certain action.
o If the outcomes are desirable then the action in question is morally right; if the outcomes of the
action are not desirable, the action is morally wrong.
o Consequentialist ethics is often referred to as teleological, based on the Greek word for ‘goal’.
 Non-consequentialist theories base the moral judgment on the underlying principles of the decision-
maker’s motivation.
o An action is right or wrong, not because we like the consequences they produce, but because the
underlying principles are morally right.
o Also called deontological theories, based on the Greek word for ‘duty’.
Fig 2.2 provides a short overview of the relevant philosophical schools and the basic elements of their thinking.
Table 2.1 Major normative theories in business ethics.
Egoism Utilitarianism Ethics of Duties Rights and Justice
Contributors Adam Smith Jeremy Bentham, John Immanuel Kant John Locke,
Stuart Mill John Rawls.
Focus Individual desires or Collective welfare. Duties. Rights.
interests
Rules Maximization of Act/rule utilitarianism. Categorical Respect for human
desires/self-interest. imperative. beings.
Concept of human Man as an actor with Man is controlled by Man is a rational Man is a being that is
beings limited knowledge and avoidance of pain and moral actor distinguished by dignity.
objectives gain of pleasure
(‘hedonist’)
Type Consequentialist. Consequentialst. Non-consequentialst. Non-consequentialist.
Egoism
 Following the theory of egoism, an action is morally right if the decision maker freely decides in order to
pursue either their (short-term) desires or their (long term) interests.
Utilitarianism
 An action is morally right if it results in the greatest amount of good for the greatest amount of people
affected by the action.

Ethics of rights
 Natural rights are certain basic, important, unalienable entitlements that should be respected and protected
in every single action.
 Example of human rights statement by a multinational.

Philips supports and respects human rights and strives to ensure that its activities do not make it an accessory to
infringements of human rights (www.philips.com)

Ethics of justice
 Justice is the simultaneously fair treatmentof individuals in a given situation with the result that everybody
gets what they deserve.

Summary of Traditional Views/Theories of Ethics

There are four perspectives on business ethics:

The Utilitarian View of Ethics

The theory states that decisions are made solely on the basis of their outcomes consequences. The goal of utilitarianism is to provide
the greatest good for the greatest number. This view tends to dominate business decision-making. Following the utilitarian view, a
manager might conclude that laying of 20 percent of the workforce in his/her plant is justified because it will increase the plant’s
profitability, improve job security for remaining 80 percent and be in the best interest of stockholders. On the one hand, utilitarianism
encourages efficiency and productivity and is consistent with the goal of profit maximization. On the other hand, it can result on
biased allocations of resources, especially when some of those affected by the decision lack representation or a voice in the decision.
Utilitarianism can also result in the rights of some stakeholders being ignored.

The Rights View of Ethics

The view is concerned with respecting and protecting individual liberties and privileges, including the rights to privacy, freedom of
conscience, free speech and due process. This would include, for example, protecting the rights of employees to free speech when
they report violations of laws by their employers (whistle-blowing). The positive side of the rights perspective is that it protects
individuals’ freedom and privacy. But it has a negative side in organizations. It can present obstacles to high productivity and
efficiency by creating a work climate that is more concerned with legally protecting individuals’ rights than with getting the job done.

The Theory of Justice View of Ethics

The theory calls for managers to impose and enforce rules and impartiality so that there is an equitable distribution of benefits and
costs. Union members typically favour this view. It justifies paying people the same wage for a given job, regardless of performance
differences, and using seniority as the primary determination in making layoff decisions. The positive side of this view is that it
protects the interests of those stakeholders who may be underrepresented or lack power, but it can encourage a sense of entitlement
that might make employees reduce risk taking, innovation, and productivity.

The Integrative Social Contracts Theory

The theory proposes that decisions should be made on the basis of empirical (what is) and normative (what should be) approaches to
business ethics. This view is based on the integration of two “contracts”, the general social contract among economic participants that
defines the ground rules for doing business and a more specific contract among specific members of a community that covers
acceptable ways of behaving. For instance, in deciding what wage to pay workers in a new factory in Maputo, Mozambique, the
integrative social contracts theory would say that an organization would base the decision on existing wage levels in the community.
This view of business ethics differs from the other three in that it suggests that managers need to look at existing ethical norms in
industries and corporations in order to determine what constitutes right and wrong decisions and actions.

Studies have shown that most decision makers tend to hold utilitarian attitudes toward ethical behaviour. By maximizing profits, for
instance, an executive can argue that he/she is gaining the greatest good for the greatest number. As a result a lot of questionable
actions can be justified when framed as being in the best interest of “the organization” and stockholders. But many critics argue that
this perspective needs to change. Increased concern in society about individual rights and social justice suggests the need for
managers to develop ethical standards based on non-utilitarian criteria. This presents a solid challenge to today’s managers because
making decisions using criteria such as individual rights and social justice involves far more ambiguities than using utilitarian criteria
such as effects on efficiency and profits. This helps to explain why managers are increasingly criticized for their actions. Raising
prices, selling products with questionable effects on consumer health, closing down inefficient plants, laying off large numbers of
 employees, moving production overseas to cut costs, and similar decisions can be justified in utilitarian terms. But that may no longer
be the single criterion by which good decisions should be judged.

Activity
How would you apply utilitarianism to the concept of stakeholder theory? Do you think that the two different perspectives would
suggest different obligations towards stakeholders?

2.4.2 Problems with utilitarianism

 Subjectivity
 Problems of quantification
 Distribution of utility.

2.4.3 Problems with ethics of duty

 Undervaluing outcomes
 Complexity
 Optimism

2.4.4 Limits of Traditional Theories

 Too abstract. Too theoretical and impractival for the pragmatic day-to-day concerns of managers.
 Too reductionist. Tends to focus on one aspect of morality at the cost of all the rest of morality.
 Too objective and elitist.
 Too impersonal. Does not take account of personal bonds and relationships that shape thoughts and
feelings about right and wrong.
 Too rational and codified.

2.7 TOWARDS A PRAGMATIC USE OF ETHICAL THEORY

 There is no ‘one best’ theory or approach of a moral dilemma.
 Rather than seeing ethical theory as a kind of ‘lens’ through which to focus ethical decision-making on a
specific consideration, such a rights, duties, discourse, or whatever (‘Lens’ of ethical theory), it is
suggested that all of the theoretical approaches throw light from different angles on one and the same
problem and thus work in a complementary rather than a mutually excluding fashion (‘Prism)’ of ethical
theories).
 The ‘prism’ view is preferred, as it is pluralist (or eclectic), and provides a variety of considerations
pertinent to the moral assessment of the matter at hand.
 Based on this ‘spectrum’ of views, the business actor then is able to fully comprehend the problem, its
issues and dilemmas, and its possible solutions and justifications.
 In addition to embracing the notion of pluralism, this approach genuinely confront the issue that real
business decisions normally involve multiple actors with a variety of ethical views and convictions which
feed into the decision.

 DESCRIPTIVE ETHICAL THEORIES

 Seek to describe how ethical decisions are actually made in business, and what influences the process and
outcomes of those decisions.
 Rather than telling us what businesspeople should do, they seek to tell us what businesspeople actually do
 – and more importantly, they help explain why they do it.

2.8.1 What is an ethical decision?

An ethical decision is one that meets the following criteria:
 The decision is likely to have significant effects on others.
 The decision is likely to be characterized by choice, in that alternative courses of action are open.
 The decision is perceived as ethically relevant by one or more parties

2.8.2 Stages in ethical decision-making

Fig 2.2 Ethical decision-making process

Recognize moral Make moral Establish moral Engage in

issue judgment intent moral
behaviour

Source: Derived from Rest (1986), as cited in Jones, T.M. (1991). Ethical decision making by individuals in organisations: an issue-
contingent model. Academy of Management Review, 16:366-95

2.8.3 Influences on ethical decision-making

Models of ethical decision-making generally divide the factors which influence decisions into two broad
categories: individual and situational.
 Individual factors
o Unique characteristics of the individual actually making the relevant decision.
o Include factors given by birth (such as age and gender) and those acquired by experience and
socialization (such as education, personality, and attitude). These are summarized below

Age and gender

National and cultural characteristics
Education and employment
Psychological factors:
Cognitive moral development
Locus of control
Personal values
Personal integrity
Moral imagination.

 Situational factors.
o Particular features of the context that influence whether the individual will make an ethical or an
unethical decision.
o Include factors associated with the context (such as reward system, job roles, and organizational
culture) and those associated with the issue itself (such as issue intensity of the moral issue, or the
ethical framing of the issue). These are summarized below:
Type of Factor Factor
Issue-related Moral intensity
 Moral framing
Context-related Rewards
Authority
Bureacracy
Work roles
Organizational culture
National context

2.8.4 Framework for understanding ethical decision-making

The ethical decision-making process is linked to the situational factors to provide a framework used to
structure discussion on ethical decision-making.

Fig 2.3 Framework for understanding ethical decision-making.

Individual factors

Recognize moral Make moral Establish moral Engage in moral

issue judgment intent behaviour

Situational factors

2.9 FACTORS THAT AFFECT MANAGERIAL ETHICS

Whether a manager acts ethically or unethically is the result of a complex interaction between the manager’s stage
of moral development and several moderating variables, including individual characteristics, the organisation’s
structural design, the organization culture, and intensity of the ethical issue. People who lack a strong moral sense
are much less likely to do the wrong things if they’re constrained by rules, policies, job descriptions or strong
cultural norms that disapprove of such behaviours. Conversely, very moral individuals can be corrupted by an
organizational structure and culture that permits or encourages unethical practices. Moreover, managers are more
likely to make ethical decisions on issues when high moral intensity is involved. Fig 2.2 provides a summary of the
factors that affect managerial ethics.

Fig 2.2 – Factors that Affect Managerial Ethics

Individual Issue
Characteristics Intensity

Ethical Stage of Moral Moderators Ethical/Unethical

Dilemma Development Behavior

Structural Organizational

1. Stage of Moral Development Variables Culture

Substantial research confirms the existence of three levels of moral development, each composed of two stages. At
each successive stage, an individual’s moral judgment becomes less and less dependent on outside influences. The
three levels and six stages are described in table 2.4
 The first stage is labeled preconventional. At this level, individuals respond to notions of right or wrong
when there are personal consequences involved, such as physical punishment, reward, or exchange of
favours.
 Reasoning at the conventional level indicates that moral values reside in maintaining the conventional
order and the expectations of others.
 At the principled level, individuals make a clear effort to define moral principles apart from the authority
of the groups to which they belong or society in general.

Table 2.4 – Stages of Moral Development

Level Description of Stage

Principled 6. Following self-chosen ethical principles
even if they violate the law.
5. Valuing rights of others and upholding
absolute values and rights regardless of the
majority’s opinion.

Conventional 4. Maintaining conventional order by fulfilling obligations to

Which you have agreed
3. Living up to what is expected by people close to you.

Preconventional 2. Following rules only when doing so is in your immediate interest.

1. Sticking to rules to avoid physical punishment.

Source: Based on L Kohl berg, “Moral Stages and Moralization: The Cognitive-Development Approach,” in T Lickons (ed), Moral Development
and Behaviour: Theory, Research, and Social Issues (New York, Halt, Rinehart & Winston, 1976, pp 34-35.

Research on these stages draws several conclusions:

 First, people proceed through the 6 stages in lockstep fashion. They gradually move up the ladder, stage by
 stage.
 Second, there is no guarantee of continued moral development. Development can terminate at any stage.
 Third, the majority of adults are at stage 4. They are limited by obeying the rules and will be predisposed
to behave ethically. For instance, a stage 3 manager is likely to make decisions that will receive peer
approval; a stage 4 manager will seek to be a “good corporate citizen” by making decisions that respect the
organisation’s rules and procedures; and a stage 5 manager is likely to challenge organizational practices
that he or she believes to be wrong. Many recent efforts by colleges to raise student’s ethical awareness
and standards are focused on helping them move to the principled level.

2. Individual Characteristics
 Every person enters an organization with relatively entrenched set of values. Developed in an individual’s
early years – from parents, teachers, friends and others – these values represent basic convictions about
what is right and wrong. Thus managers in an organization often possess very personal values.
 Two personality variables have also been found to influence an individual’s actions according to his/her
beliefs about what is right or wrong: ego strength and locus of control.
- Ego strength is a personality measure of the strength of a person’s convictions. People who score high
on ego strength are likely to resist impulses and follow their convictions more than those who are low
on ego strength. That is, individuals high on ego strength are more likely to do what they think is
right. We would expect managers with high ego strength to demonstrate more consistency between
moral judgment and moral action than those with low ego strength.
- Locus of control is a personality attribute that measures the degree to which people believe they are
masters of their own fate. People with an internal locus of control believe that they control their own
destinies; those with an external locus of control believe that what happens to them in life is due to
luck or chance. From an ethical perspective, externals are less likely to take personal responsibility for
the consequences of their behaviour and are more likely to rely on external forces. Internals, on the
other hand, are more likely to take responsibility for consequences and rely on their own internal
standards of right and wrong to guide their behaviour. Managers with an internal locus of control will
probably demonstrate more consistency between their moral judgments and moral actions than will
external managers.

3. Structural Variables
An organisation’s structural design helps shape the ethical behaviour of managers. Some structures provide strong
guidance, whereas others only create ambiguity for managers. Structural designs that minimize ambiguity and
continuously remind managers of what is ethical are ore likely to encourage ethical behaviour.
 Formal rules and regulations reduce ambiguity. Job descriptions and written codes of ethics are examples
of formal guides that promote consistent behaviour.
  Research show, though, that the behaviour of superiors is the strongest single influence on an individual’s
own ethical or unethical behaviour. People check to see what those in authority are doing and use that as a
benchmark for acceptable practices and what is expected of them.
 Some performance appraisal systems focus exclusively on outcomes. Others evaluate means as well as
ends. When managers are evaluated only on outcomes, there are increased pressures to do “whatever is
necessary” to
 look good on the outcome variable. Closely related with the appraisal system is the way rewards are
allocated. The more rewards or punishment depend on specific goal outcomes, the more pressure there is
on managers to do whatever they must to reach those goals and perhaps compromise their ethical standards.
 Structure also differs in the amount of time, competition, cost, and similar pressures placed on jobholders.
The greater the pressure, the more likely it is that managers will compromise their ethical standards.
4. Organisation’s Culture
 The content and strength of an organisation’s culture also influence ethical behaviour. An organisation’s
culture most likely to shape high ethical standards is one that is high in risk tolerance, control, and conflict
tolerance. Managers in such a culture are encouraged to be aggressive and innovative, are aware that
unethical practices will be discovered, and feel free to openly challenge demands or expectations they
consider to be unrealistic or personally undesirable.
 A strong culture will exert more influence on managers than a weak one. It the culture is strong and
supports high external standards, it should have a very powerful and positive influence on manager’s
ethical behaviour. The Boeing Company, for example, has a strong culture that has long stressed ethical
corporate dealings with customers, employees, the community, and shareholders. To reinforce the
importance of ethical decisions and actions, the company developed a series of light-hearted posters
designed to grab employee’s attention and then focus on more serious ethics subjects.
 In a weak organizational culture, however, managers are more likely to rely on subculture norms as a
behaviour guide. Workgroups and departmental standards will strongly influence ethical behaviour in
organizations with weak overall cultures.

1. Issue Intensity
student who would never consider breaking into an instructor’s office to steal an exam does not think twice
about asking a friend who took the same course from the same instructor last year what questions were on
the exam. Similarly, an executive might think nothing about taking home a few office supplies yet be
highly concerned about the possible embezzlement of company funds. These examples illustrate the final
factor that affects a manager’s ethical behaviour; the characteristics of the ethical issue itself.
Six characteristics have been identified as relevant in determining issue intensity as shown in fig. 2.3.
Fig 2.3 – Characteristics That Determine Issue IntensityA
 Issue Intensity

Concentration of Effect

Consensus of Evil

Probability of Harm

Immediacy of
Consequences

Proximity of Victim

Greatness of Harm

 How great a harm (or benefit) is done to victim (or beneficiaries) of the ethical act in question? Example:
Putting 1000 people out of work is more harmful than putting only 10 people out of work.
 How much consensus is there that the act is evil (or good). Example: More Americans agree that it is
wrong to bribe a customs official in Texas than agree it is wrong to bribe a customs official in Mexico.
 What is the probability that the act will actually take place and will actually cause the harm (or benefit)
predicted? Example: Selling a gun to a known armed robber has greater probability of harm than selling a
gun to a law-abiding citizen.
 What is the length of time between the act in question and its expected consequences? Example:
Reducing the retirement benefit of current retirees has greater immediate consequences than reducing the
retirement benefits of current employees who are between the ages of 40 and 50.
 How close do you feel (socially; psychologically; or physically) to the victims (or beneficiaries) of the evil
(beneficial act) in question? Example: Layoffs in one’s own work unit hit closer to home than do layoffs in
a remote city.
 How large is the concentrated effect of the ethical act on the people involved? Example: a change in the
warranty policy denying coverage to 10 people with claims of $10m has a more concentrated effect than a
change denying coverage to 10 000 people with claims of $10 000.
According to these guidelines, the larger the number of people harmed, the greater the consensus that an act is evil,
the higher the probability that an act will take place and actually cause harm, the shorter the length of time until the
consequences of the act surface, and the closer the observer feels to the victims of the act, the greater the issue
intensity. In sum, these 6 factors determine how important an ethical issue is, and we should expect managers to
behave more ethically when a moral issue is important to them than when it is not.

2.7 ETHICAL PRINCIPLES

• Ethical values, translated into active language establishing standards or rules describing the kind of behavior an
ethical person should and should not engage in, are ethical principles.
• The following list of principles incorporate the characteristics and values that most people associate with ethical
behavior. Ethical decision making systematically considers these principles.

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.

Integrity. Ethical executives demonstrate personal integrity and the courage of their convictions by doing what they
think is right even when there is great pressure to do otherwise; they are principled, honorable and upright; they will
fight for their beliefs. They will not sacrifice principle for expediency, be hypocritical, or unscrupulous.

Promise-keeping and Trustworthiness. Ethical executives are worthy of trust. They are candid and forthcoming
in supplying relevant information and correcting misapprehensions of fact, and they make every reasonable effort to
fulfill the letter and spirit of their promises and commitments. They do not interpret agreements in an unreasonably
technical or legalistic manner in order to rationalize non-compliance or create justifications for escaping their
commitments.

Loyalty. Ethical executives are worthy of trust, demonstrate fidelity and 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. They safeguard the ability to make independent professional judgments by scrupulously
avoiding undue influences and conflicts of interest. They are loyal to their companies and colleagues and if they
decide to accept other employment, they provide reasonable notice, respect the proprietary information of their
former employer, and refuse to engage in any activities that take undue advantage of their previous positions.

Fairness. Ethical executives and fair and just in all dealings; they do not exercise power arbitrarily, and do not use
overreaching nor indecent means to gain or maintain any advantage nor take undue advantage of another’s mistakes
or difficulties. Fair persons manifest a commitment to justice, the equal treatment of individuals, tolerance for and
acceptance of diversity, the they are open-minded; they are willing to admit they are wrong and, where appropriate,
change their positions and beliefs.

Concern for others. Ethical executives are caring, compassionate, benevolent and kind; they help those in need,
and seek to accomplish their business objectives in a manner that causes the least harm and the greatest positive
good.

Respect for others. Ethical executives demonstrate respect for the human dignity, autonomy, privacy, rights, and
interests of all those who have a stake in their decisions; they are courteous and treat all people with equal respect
and dignity regardless of sex, race or national origin.
Law Abiding. Ethical executives abide by laws, rules and regulations relating to their business activities.

Commitment to Excellence. Ethical executives pursue excellence in performing their duties, are well informed and
prepared, and constantly endeavor to increase their proficiency in all areas of responsibility.

Leadership. Ethical executives are conscious of the responsibilities and opportunities of their position of leadership
and seek to be positive ethical role models by their own conduct and by helping to create an environment in which
principled reasoning and ethical decision making are highly prized.

Reputation and Morale. Ethical executives seek to protect and build the company’s good reputation and the morale
of its employees by engaging in no conduct that might undermine respect and by taking whatever actions are
necessary to correct or prevent inappropriate conduct of others.

Accountability. Ethical executives acknowledge and accept personal accountability for the ethical quality of their
decisions and omissions to themselves, their colleagues, their companies, and their communities.

2.7.1 Caux Round Table (CRT) Principles of Responsible Business

The CRT Principles for Business are a worldwide vision for ethical and responsible corporate behavior and serve as
a foundation for action for business leaders worldwide. As a statement of aspirations, The CRT Principles aim to
express a world standard against which business behavior can be measured.

These principles are rooted in two basic ethical ideals: kyosei and human dignity. The Japanese concept of kyosei
means living and working together for the common good enabling cooperation and mutual prosperity to coexist with
healthy and fair competition. "Human dignity" refers to the sacredness or value of each person as an end, not simply
as a mean to the fulfillment of others' purposes or even majority prescription.

The principles are rooted in three ethical foundations for responsible business and for a fair and functioning society
more generally, namely: responsible stewardship; living and working for mutual advantage; and the respect and
protection of human dignity

The principles also have a risk management foundation - because good ethics is good risk management. And they
balance the interests of business with the aspirations of society to ensure sustainable and mutual prosperity for all.

The CRT Principles for Responsible Business are supported by more detailed Stakeholder Management Guidelines
covering each key dimension of business success: customers, employees, shareholders, suppliers, competitors, and
communities.
Principle 1 – Respect Stakeholders Beyond Shareholders.
  A responsible business acknowledges its duty to contribute value to society through the wealth and
employment it creates and the products and services it provides to consumers.
 A responsible business maintains its economic health and viability not just for shareholders, but also for
other stakeholders.
 A responsible business respects the interests of, and acts with honesty and fairness towards, its customers,
employees, suppliers, competitors, and the broader community.
Principle 2 – Contribute to Economic, Social, and Environmental Development
 A responsible business recognizes that business cannot sustainably prosper in societies that are failing or
lacking in economic development.
 A responsible business therefore contributes to the economic, social and environmental development of the
communities in which it operates, in order to sustain its essential ‘operating’ capital – financial, social,
environmental, and all forms of goodwill.
 A responsible business enhances society through effective and prudent use of resources, free and fair
competition, and innovation in technology and business practices.
Principle 3 – Build Trust by Going Beyond the Letter of the Law
 A responsible business recognizes that some business behaviors, although legal, can nevertheless have
adverse consequences for stakeholders.
 A responsible business therefore adheres to the spirit and intent behind the law, as well as the letter of the
law, which requires conduct that goes beyond minimum legal obligations.
 A responsible business always operates with candor, truthfulness, and transparency, and keeps its promises.
Principle 4 – Respect Rules and Conventions
 A responsible business respects the local cultures and traditions in the communities in which it operates,
consistent with fundamental principles of fairness and equality.
 A responsible business, everywhere it operates, respects all applicable national and international laws,
regulations and conventions, while trading fairly and competitively.
Principle 5 – Support Responsible Globalisation
 A responsible business, as a participant in the global marketplace, supports open and fair multilateral trade.
 A responsible business supports reform of domestic rules and regulations where they unreasonably hinder
global commerce.
Principle 6 – Respect the Environment
 A responsible business protects and, where possible, improves the environment, and avoids wasteful use of
resources.
 A responsible business ensures that its operations comply with best environmental management practices
consistent with meeting the needs of today without compromising the needs of future generations.
Principle 7 – Avoid Illicit Activities
  A responsible business does not participate in, or condone, corrupt practices, bribery, money
laundering, or other illicit activities.
 A responsible business does not participate in or facilitate transactions linked to or supporting terrorist
activities, drug trafficking or any other illicit activity.
 A responsible business actively supports the reduction and prevention of all such illegal and illicit
activities.

2.7.2 Stakeholder Management Guidelines

 The CRT’s Stakeholder Management Guidelines supplement the CRT Principles for Responsible
Business with more specific standards for engaging with key stakeholder constituencies.
 The key stakeholder constituencies are those who contribute to the success and sustainability of
business enterprise. Customers provide cash flow by purchasing good and services; employees produce
the goods and services sold, owners and other investors provide funds for the business; suppliers
provide vital resources; competitors provide efficient markets; communities provide social capital and
operational security for the business; and the environment provides natural resources and other
essential conditions.
 In turn, key stakeholders are dependent on business for their well-being and prosperity. They are the
beneficiaries of ethical business practices.

 Customers
o A responsible business treats its customers with respect and dignity. Business therefore has a
responsibility to:
o Provide customers with the highest quality products and services consistent with their requirements.
o Treat customers fairly in all aspects of business transactions, including providing a high level of
service and remedies for product or service problems or dissatisfaction.
o Ensure that the health and safety of customers is protected.
o Protect customers from harmful environmental impacts of products and services.
o Respect the human rights, dignity and the culture of customers in the way products and services are
offered, marketed, and advertised .
 Employees
o A responsible business treats every employee with dignity and respects their interests. Business
therefore has a responsibility to:
o Provide jobs and compensation that contribute to improved living standards
o Provide working conditions that protect each employee's health and safety.
o Provide working conditions that enhance each employee’s well-being as citizens, family members, and
capable and caring individuals
 o Be open and honest with employees in sharing information, limited only by legal and competitive
constraints.
o Listen to employees and act in good faith on employee complaints and issues.
o Avoid discriminatory practices and provide equal treatment, opportunity and pay in areas such as
gender, age, race, and religion.
o Support the employment of differently-abled people in places of work where they can be productive.
o Encourage and assist all employees in developing relevant skills and knowledge.
o Be sensitive to the impacts of unemployment and work with governments, employee groups and other
agencies in addressing any employee dislocations.
o Ensure that all executive compensation and incentives further the achievement of long- term wealth
creation, reward prudent risk management, and discourage excessive risk taking.
o Avoid illicit or abusive child labor practices.

 Shareholders
o A responsible business acts with care and loyalty towards its shareholders and in good faith for the best
interests of the corporation. Business therefore has a responsibility to:
o Apply professional and diligent management in order to secure fair, sustainable and competitive
returns on shareholder investments.
o Disclose relevant information to shareholders, subject only to legal requirements and competitive
constraints.
o Conserve, protect, and increase shareholder wealth.
o Respect shareholder views, complaints, and formal resolutions.

 Suppliers
o A responsible business treats its suppliers and subcontractors with fairness, truthfulness and mutual
respect. Business therefore has a responsibility to:
o Pursue fairness and truthfulness in supplier and subcontractor relationships, including pricing,
licensing, and payment in accordance with agreed terms of trade.
o Ensure that business supplier and subcontractor activities are free from coercion and threats.
o Foster long-term stability in the supplier relationships in return for value, quality, competitiveness and
reliability.
o Share information with suppliers and integrate them into business planning.
o Seek, encourage and prefer suppliers and subcontractors whose employment practices respect human
rights and dignity.
o Seek, encourage and prefer suppliers and subcontractors whose environmental practices meet best
practice standards.
 Competitors
o A responsible business engages in fair competition which is a basic requirement for increasing the
wealth of nations and ultimately for making possible the just distribution of goods and services.
Business therefore has a responsibility to:
o Foster open markets for trade and investment.
o Promote competitive behavior that is socially and environmentally responsible and demonstrates
mutual respect among competitors.
o Not participate in anti-competitive or collusive arrangements or tolerate questionable payments or
favors to secure competitive advantage.
o Respect both tangible and intellectual property rights.
o Refuse to acquire commercial information through dishonest or unethical means, such as industrial
espionage.

 Communities
o As a global corporate citizen, a responsible business actively contributes to good public policy and to
human rights in the communities in which it operates. Business therefore has a responsibility to:
o Respect human rights and democratic institutions, and promote them wherever practicable.
o Recognize government’s legitimate obligation to society at large and support public policies and
practices that promote social capital.
o Promote harmonious relations between business and other segments of society.
o Collaborate with community initiatives seeking to raise standards of health, education, workplace
safety and economic well-being.
o Promote sustainable development in order to preserve and enhance the physical environment while
conserving the earth's resources.
o Support peace, security and the rule of law.
o Respect social diversity including local cultures and minority communities.
o Be a good corporate citizen through ongoing community investment and support for employee
participation in community and civic affairs.
MANAGING BUSINESS ETHICS: TOOLS AND TECHNIQUES OF BUSINESS ETHICS
MANAGEMENT

3.1 INTRODUCTION
Top management can do a number of things if they are serious about reducing unethical practices in their
organizations. They can seek to select individuals with high ethical standards, establish codes of ethics and decision
rules, lead by example, delineate job goals, and provide ethics training. Taken individually, these actions will
probably not have much impact. But when all or most of them are implemented as part of a comprehensive ethics
program, they have the potential to significantly improve an organisation’s ethical climate.

3.2 INDIVIDUAL RESPONSES TO ETHICAL ISSUES

The following framework provide a summary the different categories of individual manager’s responses to ethical
issues.

Developing Ethical puzzle Ethical problem

Principles

Achieving the
Ethical convention Ethical dilemma
Common good
Dialect
of
ethical The obligation Ethical awareness Ethical cynicism and
purpose of Duty caprice
self-
consciousness Ethical neutrality Ethical negotiation

Personal Personal
certainty, aporia,
fixed priorities shifting priorities
and values and values

Degree of ethical category

Source: Fisher and Rice (1999) Manager’s Perception of ethical issues – a framework

3.3 ORGANISATIONAL RESPONSES TO ETHICAL ISSUED: BUSINESS ETHICS MANAGEMENT?

 Business ethics management is the direct attempt to formally or informally manage ethical issues or
problems through specific policies, practices and programmes.

3.4 APPROACHES TO IMPROVE ETHICAL CONDUCT IN THE WORKPLACE

 Typical components of business ethics management are summarized in Table 3.1.
Table 3.1 Business ethics management
 Mission or values statements.
 Codes of ethics.
 Reporting/advice channels.
 Risk analysis and management.
 Ethics managers, officers and committees.
 Ethics consultants.
 Ethics education and training.
 Auditing, accounting and reporting.

The following section provides a brief summary of some of the approaches to improving ethical behavior
in organisations.
 Selection. Given that individuals are at different stages of moral development and possess different
personal value systems and personalities, an organisation’s employee selection process – interviews,
tests, background checks, and the like – should be used to eliminate ethically undesirable applicants.
Thus, the selection process should be viewed as an opportunity to learn about an individual’s level of
moral development, personal values, ego strength, and locus of control.

 Codes of Ethics and Decision Rules. In general a code of ethics, or code of conduct, is established
by top management, and will contain a statement of a company’s values, beliefs and norms of ethical
behaviour. Ideally, a code of ethics should provide employees with guidance for dealing with ethical
dilemmas, and the organisation’s position in respect of ethical uncertainty and moral behaviour. More
issues regarding codes of ethics are discussed in section 3.3.

 Top Management leadership. Codes of ethics require a commitment from top managers. Why?
Because it’s the top managers who set the cultural tone. They are role models in terms of both words
and actions, though what they do is probably far more important than what they say. If top managers,
for example, use company resources for their personal use, inflate their expense accounts, or give
favoured treatment to friends, they imply that such behaviour is acceptable for all employees. Top
managers also set the cultural tone by their reward and punishment practices the choice of whom and
what are rewarded with pay increases and promotions send a strong message to employees. Other
issues are discussed in section 3.4
 Job Goals. Employees should have tangible and realistic goals. Explicit goals can create ethical
problems if they make unrealistic demands on employees. Under the stress of unrealistic goals,
 otherwise ethical employees will often take the attitude the “anything goes”. When goals are clear and
realistic, they reduce ambiguity for employees and motivate rather than punish.

 Ethics Training. More and more organizations are setting up seminars, workshops, and similar ethics
training programs to try to increase ethical behaviour. The primary debate is whether you can actually
teach ethics. Critics, for instance, stress that the effort is pointless because people establish their
individual value systems when they are young. Proponents, however, note that several studies have
found that values can be learned after early childhood. In addition, they cite evidence that shows that
teaching ethical problem solving can make an actual difference in ethical behaviours (Gavin, 1989, pp
54-57), that training has increased individuals’ level of moral development, (Penn and Collier, 1985 pp
131-36), and that, if it does nothing else, ethics training increases awareness of ethical issues in
business (Weber, 1990, pp 182-90).

How do you teach ethics? The code of ethics can be accompanies by a videotape and line-action
dramas by employees that bring ethics to life for employees and make it more relevant to their
everyday workplace behaviours. Further discussion of ethics education is on section 3.5.

 Comprehensive Performance Appraisal. When performance appraisals focus only on outcomes,

ends will begin to justify means. If an organization wants its managers to uphold high ethical
standards, it must include this dimension in its appraisal process for example; a manager’s annual
review might include a point-by-point evaluation of how his/her decisions measured against the
company’s code of ethics as well as on the more traditional economic criteria.

 Independent Social Audits. An important element of unethical behaviour is fear of being caught.
Independent audits, which evaluate decisions and management practices in terms of the organization’s
code of ethics, increase the likelihood of detection. These audits can be routine evaluations, performed
on a regular basis just as financial audits are, or they can occur randomly with no prior announcement.
An effective ethical program should probably include both. To maintain integrity, the auditors should
be responsible to the company’s board of directors and present their findings directly to the board.
This practice not only gives the auditors clout, but also lessens the opportunity for retaliation from
those being audited.

 Formal Protective Mechanisms. Organisations should provide formal mechanisms so that employees
who face ethical dilemmas can do something about them without fear of reprimand. An organization
might, for instance, designate ethical counselors. When employees face a dilemma, they could go to
these advisers for guidance. An ethical advocate can also be used to improve ethical conduct in the
 workplace. An ethical advocate is normally a top-level executive who, in many ways serves as the
organisation’s full time ethical conscience. His/her job is to evaluate the organization’s actions from
an ethical point of view, and openly questioning the ethical implications of the organization’s proposed
plans of action. The organization might also create a special appeals process that employees could use
without risk to themselves to raise ethical issues or blow the whistle on violators. Discussion on
whistle blowing is done in section 3.6.

3.5 CODE OF ETHICS

3.5.1 What are codes of ethics?
 Codes of ethics are voluntary statements that commit organisations, industries, or professions to specific
beliefs, values, and actions and/or that set out appropriate ethical behavior for employees.
 A code of ethics is a formal document that states an organisation’s primary values and the ethical rules it
expects its employees to follow. It has been suggested that codes should be specific enough to show
employees the spirit in which they are supposed to do things yet loose enough to allow for freedom of
judgment.
 An organization’s code of conduct is one of the most important communications vehicles that management
can use to communicate to employees on key standards that define acceptable business conduct.
 A well-written and communicated code goes beyond restating company policies—such a code sets the tone
for the organization’s overall control culture, raising awareness of management’s commitment to integrity
and the resources available to help employees achieve management’s compliance goals.

3.5.2 Types of ethical codes

 Organisational or corporate codes of ethics.
o Specific to a single organization.
 Professional codes of ethics
o Guide appropriate conduct for members of profession, such as medicine, law, accountancy, etc.
 Industry codes of ethics
o Specific to particular industries, such as financial services, electronics, chemical.
 Programme or group codes of ethics.
o For certain programmes, coalitions, or other sub-groupings of organisations.
o E.g. CAUX Roundtable Principles.
o
3.5.3 Contents of a Code of Ethics

A well-designed code of conduct typically includes:

o High-level endorsement from the organization’s leadership, underscoring a commitment to integrity

 o Simple, concise, and positive language that can be readily understood by all employees

o Topical guidance based on each of the company’s major policies or compliance risk areas

o Practical guidance on risks based on recognizable scenarios or hypothetical examples

o A visually inviting format that encourages readership, usage, and understanding

o Ethical decision-making tools to assist employees in making the right choices

o A designation of reporting channels and viable mechanisms that employees can use to report concerns or
seek advice without fear of retribution.

A study of varied firms as Exxon, Sara Lee, DuPont, Bank of Boston, and Wisconsin Electrical Power – found that
their content tended to fall into 3 categories:
1. Be a dependable organizational citizen,
2. Do not do anything unlawful or improper that will harm the organization, and
3. Be good to customers.
Appendix I lists the variables included in each of these clusters in order of their frequency of mention.

3.5.4 Example of Code of Ethics for a corporation

Refer to Unilever’s Code of Business Principles on www.unilever.com

3.5.5 Effectiveness of Ethical Codes

The effectiveness of ethical codes depends heavily on whether management supports them and how employees who
break the codes are treated. When management considers them to be important, regularly reaffirms their content,
and publicly reprimands rule breakers, ethics codes can supply a strong foundation for an effective corporate ethics
program.

3.5.6 Ethical and Professional Standards

It is an important requirement that employees in any profession be guided by some ethical and professional
standards as their basis for ethical conduct. The following section summarizes the framework for ethical conduct in
the investment profession as presented in the CFA Institute Standards of Practice Handbook (SOPH).

The principles and guidance presented in the CFA Institute Standards of Practice Handbook (SOPH) form the
basis for the CFA Institute self-regulatory program to maintain the highest professional standards among investment
practitioners. A clear understanding of the CFA Institute Code of Ethics and Standards of Professional Conduct
(both found in the SOPH) should allow the practitioner to identify and appropriately resolve ethical conflicts.

3.7 LEADERSHIP AND INTEGRITY

In the workplace, we are faced daily with the responsibility of making decisions. Companies hire people with
integrity and expertise. These leaders have a responsibility to the people who work for them and the society, in
general, to provide employees with guidelines for making ethical decisions. Ethics and ways in which leaders apply
ethical standards in work settings is of concern and importance to all.

How do corporate and institutional leaders decide what is the best decision? How do employees learn to behave and
work in an ethical way? The best way to make a decision is to think of results: What is the best way to achieve
several goals? Once that question is answered, the ethical decision is made.

3.7.1 How Ethical Decisions are Made

Ethical decisions are made by business leaders based on these considerations:
1. How can employees feel fulfilled professionally?
2. How can customers be satisfied?
3. How can profit be assured for stakeholders or shareholders?
4. How can the community be served?

Many pressures affect business leaders. Ethical considerations are sometimes difficult for business leaders when
they must choose among different priorities. Making decisions based on the needs of employees, customers,
stakeholders and the community requires a good leader. What do good leaders do in order to achieve ethical
standards?
1. Laws. First, there are laws that guide business leaders. Breaking laws can lead to arrest and imprisonment.
2. Individual Ethics. Laws are not enough to assure ethical behaviours. Individual leaders and their
decision-making behaviours (ethical or unethical) set examples for employees. In the U.S. anonymous
manager surveys show that 30% of managers admit that they have sent in inaccurate reports. Clearly there
is a need to think about and work on developing ethical decision making skills for managers.
3. On-the-Job Ethical Conflicts. Four ethical conflicts confront leaders in business:
a) Conflict of Interest – A leader achieves personal gain from a decision he/she makes.
b) Loyalty versus truth – A leader must decide between loyalty to the company and truthfulness in
business relationships.
c) Honesty and integrity – A Leader must decide if he/she will be honest or lie: if he/she will take
responsibility of decisions and actions or blame someone else?
d) Whistleblowing – Does the leader tell others (media or government authorities) about unethical
behaviour of the company or institution?
 4. Creating and Maintaining a Culture of Integrity. The following attitudes and practices have profound
influence on integrity on the workplace
a) Relationships – There is need to build cooperative long-term relationships with various
stakeholders. When an organization prioritizes the preservation of these relationships, it is less
likely to engage in practices that will violate the trust that has built up.
b) Ownership – When organizations build a culture of ownership, through leadership style, share
ownership schemes and strategic reward systems it creates a sense of ownership by the
employees, and this will perpetuate a culture of integrity.
c) Systems Approach – when individuals see themselves as a subsystem of a wider system, they
begin to appreciate the consequences of their actions on the organization as a whole. What
happens to each part of the system has an effect on other parts. For example, if one steals from a
client, he/she is actually robbing himself/herself in the long run. If a leader abuses the power
he/she has over his/her employees he/she is in effect disempowering himself/herself and affecting
overall organizational performance.
d) Recruitment – The nature of one’s recruitment has a strong influence on his/her level of integrity
in the workplace. For example, practices such as “empowerment” and nepotism tend to create
cultures that result in the integrity of the organization being compromised.
e) Reward Management System - If a culture of integrity is to be created and maintained within
the organization, then it follows that integrity should be rewarded within the organization and
seen as a critical success factor for effective leadership.
f) Long-term Thinking – Having long-term thinking is useful in creating a culture of responsibility
to society at large. This is because a lot of the benefits of corporate social responsibility only
become apparent after a number of years.
g) Top Management Leadership – Top management symbolizes the values of the organization. As
a result, it is important for those at the top to be exemplary when it comes to ethics. Top
management also plays an important role in mobilizing employees in the generation of codes of
ethics; Principles of transformational leadership suggest the importance of intellectual
stimulation from the transformational leader.

3.7.2 The Role of Power and Influence

It is important to understand the nature of power dynamics as well as influence patterns whereby individuals or
groups seek to influence others to think or act in particular ways. Effective leaders have learnt how to use power
wisely to influence others. In organizations managers are entrusted with power in their respective positions and are
perceived to have authority.
Sources of Power are:
- Physical Power
 - Resource Power
- Position Power
- Expert Power
- Personal Power (or charisma)
- Negative Power.

Methods of Influence:
The above six power bases allow people to use one or more methods of influence. These can be divided into two
classes: overt and unseen
 Overt Methods of Influence are
- Force
- Exchange
- Rules and Procedures
- Persuasion
 Unseen Methods of Influence are
- Ecology: relationship between the environment to individual behaviour or attitudes.
E.g. (i) seating patterns tend to affect interaction patters (physical environment); (ii) small groups are
easier to participate in than large groups (sociological environment); (iii) specific, challenging but
attainable targets tend to produce commitments irrespective of their specific content (psychological
environments)
- Magnetism – the invisible but felt pull of a stronger force, as a result of personal power.

3.8 BUSINESS EDUCATION – ETHICS AND NEW PROFESSIONALS

Employees and future employees should know about business ethics in order to perform ethically on the job.
Standards of ethical conduct are a part of good business education and training in all geographical and business
settings. The following questions need to be addressed:
 What can academic institutions do to educate students about ethics?
 What do companies do to educate employees about ethics?
 How do employees learn to do a better job and do it ethically?
 How do governments support training for ethical business practices?
 Where do employees get information when they face a conflict between keeping a competitive edge and
maintaining ethical standards?

Success comes when companies create an innovative and supportive environment for new ideas. If a company is to
become involved and succeed in the global marketplace, it will hire new employees who are well educated in all
aspects of business, especially in business ethics. At the same time employees who are in the workforce already
must continue to learn through professional development opportunities. With a workforce trained and committed to
ethics, managers can be assured that ethical behaviour and ethical practices will prevail in the workplace. Without
training, business employees may engage in unethical business practices – even without knowing it. The following
presents some background information on ways in which business ethics is taught and learned in two contexts: in
formal educational settings, like universities and colleges, and in company-sponsored, on-the-job training programs
at work.

38.1 Business Education and Ethics in Universities and Colleges

In order to build ethical principles, business school faculty offers students a variety of opportunities to develop their
knowledge and skills in business ethics. Four instructional tools can be applied in teaching business ethics in
universities and colleges.
1. Case studies that require ethical judgment and knowledge about ethics in real-life company-based cases.
2. Assignments that require students to learn about the ethical codes of conduct in several companies.
Students talk, read and write about the issues that these codes raise inside the company and in business.
3. Tasks outside the classroom that require students to learn more about how businesses function ethically.
Students are asked to visit and tour a company, research the company’s history and ethical performance
using a variety of resources: company policy documents, company archives, newspaper reports and
magazine articles in the company, or the World Wide Web.
4. Readings from a variety of business and professional sources (professional journals, popular magazines
and newspapers, and company literature – electronic and paper) followed by discussions on the issues and
values that these readings present. Familiarity with business ethics journals (both paper and on line) is an
important part of business ethics education.

3.8.2 On the Job Training and Ethics

In most countries employees are required by law and by the company’s own ethical code to provide opportunities
for on-the-job training in specific job related ethical concerns. Some of these training opportunities are considered
to be part of employee professional development a few examples of on-the-job ethical training are:
1. Required workshops for all employees on sexual harassment awareness training. Employees attend
workshops and participate in discussions on a variety of topics that influence workplace behaviour and
help employees avoid being perpetrators or victims of sexual harassment
2. Training programs on ethical use of the World Wide Web. In these training workshops, employees learn
that the World Wide Web is a new tool that can have many uses, some ethical, some unethical. With the
advent of the WWW, massive quantities of information are available and can be used for ethical and
unethical purposes. Employees are trained in ethical web use.
3. Employee discussion groups on ethical issues. Human Resources or Personnel Department organizes
informal employee discussions on topics of relevance and concern to management. In these informal
settings, employees learn how to address ethical issues in accordance with the company’s Code of
Conduct. Morale issues and other matters are aired in these informal settings.
 4. Personnel services. Employee education and training on topics such as ethical concerns related to health,
environment, or corporate philanthropy decisions, and employee counseling.

3.9 WHISTLEBLOWING
3.9.1 Meaning of Whistleblowing
When an employee discovers unethical, immoral or illegal actions at work, the employee makes a decision about
what to do with this information. Whistleblowing is the term used to define an employee’s decision to disclose this
information to an authority figure (boss, media or government official).

A whistleblower is an employee or former employee, or member of an organization, especially a business or

government agency, who reports misconduct to people or entities that have the power and presumed willingness to
take corrective action. Generally the misconduct is a violation of law, rule, regulation and/or a direct threat to public
interest, such as fraud, health/safety violations, and corruption.

Blowing the whistle may include:

1. Reporting wrongdoing or a violation of the law to the proper authorities such as a supervisor, a hotline or
an inspector general.
2. Refusing to participate in workplace wrongdoing.
3. Testifying in a legal proceeding.
4. Leaking evidence of wrongdoing to the media.

The most common type of whistleblowers are internal whistleblowers, who report misconduct to another employee
or superior within their company or agency. In contrast, external whistleblowers report misconduct to outside
persons or entities. In these cases, depending on its severity and nature, whistleblowers may report the misconduct
to lawyers, the media, law enforcement or watchdog agencies, or to other local, or state agencies.

3.9.2 Guidelines for Whistleblowing

The following list is a guideline that will help an employee to determine if a situation merits whistleblowing.
1. Magnitude of Consequences. An employee considering whistleblowing must ask himself or herself these
questions: How much harm has been done or might be done to victims? Will the victims really be
“beneficiaries”? If one person is or will be harmed, it is unlikely to be a situation that warrants
whistleblowing.
2. Probability of Effect. The probability that the action will actually take place and will cause harm to many
people must be considered. An employee should be very sure that the action in question will actually
happen. If the employee does not know if the action will happen and if the action will harm people (or the
environment), he/she should reconsider his/her plan to blow the whistle. In addition, the employee must
 have absolute proof that the event will occur and that people (or the environment) will be harmed.
3. Temporal Immediacy. An employee must consider the length of time between the present and the possibly
harmful event. An employee must also consider the urgency of the problem in question. The more
immediate the consequences of the potentially unethical practice, the stronger the case for whistleblowing.
4. Proximity. The physical closeness of the potential victims must be considered. For example, a company
that is depriving workers of medial benefits in a nearby town has a higher proximity than one 1000
kilometers away.
The question arises about matters of emotional proximity or situations in which the ethical question relates
to a victim with some emotional attachment to the whistleblower.
5. Concentration of Effort. A person must determine the intensity of the unethical practice or behaviour.
The question is how much intensity does the specific infraction carry. For example, according to this
principle, stealing US$10 000 from one person is more unethical than stealing US$1 from 10 000 people.

3.9.3 Common Reactions to Whistleblowing

Ideas about whistleblowing vary widely. Some see whistleblowers as selfless martyrs for public interest and
organizational accountability. Others view them as pursing personal glory and fame.
Persecution of whistleblowers has become a serious issue in many parts of the world. Although whistleblowers
are often protected under law from employer retaliation, there have been many cases where punishment for
whistleblowing has occurred, such as termination, suspension, demotion, wage garnishment, and/or harsh
mistreatment by other employees. Depending on the circumstances, it is not uncommon for whistleblowers to
be ostracized by their co-workers, discriminated against by future potential employers, or even fired from their
organization. This campaign directed at whistleblowers with the goal of eliminating them from the organization
is referred to as mobbing. It is an extreme form of workplace bullying wherein the group is set against the
targeted individual.

3.10 AUDITING, ACCOUNTING, AND REPORTING

 Activities concerned with measuring, evaluating and communicating the organisation’s impacts and
performance on a range of social, ethical, and environmental issues of interest to their stakeholders.
 Initiatives, such as global reporting initiative (GRI) seek to provide internationally comparative standards
for aspects of auditing, accounting, and reporting.
 Effective management of business ethics relies on being able to assess and evaluate performance. These
include social auditing, environmental accounting, and sustainability reporting.

3.10.1 Social Accounting

 This is the voluntary process concerned with assessing and communicating organizational activities
and impacts on social, ethical, and environmental issues relevant to stakeholders.
 Reasons for engaging in social accounting include:
o Internal and external pressure
o Identifying risks
o Improved stakeholder management
o Enhanced accountability and transparency.
 The typical framework for social accounting would include the following elements:
o Stakeholder consultation to identify issues regarded as salient or of particular interest to
stakeholders, prior to the main collection of data.
o Stakeholder dialogue following publication of the report in order to obtain feedback and set
priorities for future action.
o Stakeholder satisfaction surveys of employees, customers, and others together with focus
groups and other methods of communication and data collection.
o Social auditing and other forms of internal assessment to evaluate organisations’ performance
in relation to their codes of ethics.