Business Ethics: Definition, Principles, Examples

Business ethics addresses issues of right and wrong in decision making, but how does one decide what is right and what is wrong.

Different Organisations

Different types of business exists: Small or medium privately owned business where the owner is the manager, Multi-national corporation, Public sector organisation, Charity or other organisation with a social purpose.

Similar levels and types of unethical behaviour occur in businesses, government organisations and CSOs (civil society organisations e.g. charities, non-profits etc..). There is also a focus on different stakeholders – shareholders, the general public, donors and service users – which leads to different approaches to ethics.

There are however some key differences even with businesses.

Small businesses will lack the resources of larger organisations. Managers in small businesses often have a more informal trust-based approach to managing. They often see staff as their most important asset.

Not every country will have laws for the following:

• Forbidding the testing of products on animals
• Forbidding the sale of landmines to oppressive regimes
• Prohibiting employees joining a trades union

However many people will feel strongly about these issues, making them an ethical debate.

Business Scandals in the Past

The range of business scandals inlcude:

• The banking crisis
• UK MPs’ expenses
• Various tax avoidance scandals (Panama Papers)
• Environmental catastrophes like the Gulf of Mexico oil spill
• High-value fashion stores using child labour
• Collapse of major companies like Carillion where employees lose their jobs and senior executives leave with protected pay and bonuses.
• VW (volkswagen) Emissions scandal

These scandals could lead you to think that business ethics is a contradiction.

“In one sense, business ethics can be said to begin where the law ends.” (Crane and Matten, 2010, p.7).

Business ethics often deals with issues where there is no clear view of which choice is right or wrong.

Can Businesses be Ethical?

Torrington, Hall & Taylor (2005) p.718-719

‘There is one and only one social responsibility of business: to use its resources and energy in activities designed to increase its profits as long as it stays within the rules of the game, engaging in open and free competition, without deception and fraud.’ (Friedman 1963).

Milton Friedman’s perspective

Only human beings have a moral responsibility for their actions.

It is managers’ responsibility to act solely in the interests of shareholders – any other purpose is theft from shareholders.

Social issues and problems are the proper province of the state rather than corporate managers.

He criticised CSR for the following reasons:

• Corporate philanthropy (organisations giving money to a charity) distorts the profitability of a company. Companies exist to make profits not save the planet
• Corporations should not use shareholder funds to support good causes. Such donations reduce company dividends
• Corporations cannot possess responsibilities. Corporations are social constructs – only individuals can have responsibilities (Fisher & Lovell, 2006, p. 311-314)

More Views on Social Responsibility

‘In pursuit of profits, won’t businesses act immorally whenever necessary? Aren’t executive salaries out of line? Isn’t dramatic inequality wrong? Isn’t it wrong to subject workers and middle managers in their mature years to so much insecurity? Isn’t it wrong to let people go abruptly and without a parachute? (Novak 1996).

‘Wealth or value creation is in essence a moral act.’ (Hampden-Turner & Trompenaars 1993).

Hartman, DesJardins and MacDonald (2015, p.219) state “social responsibility is what a business should or ought to do for the sake of society, even if this comes with an economic cost”.

They identify three levels of responsibility:

• A duty NOT to cause harm – not selling a product that causes harm is an example. This is often covered by legislation as well as being an ethical viewpoint.
• A duty to prevent harm (even when you are not the cause) – a company providing a drug free to those at risk of disease is an example. Merck provide a drug to prevent river blindness free in some of the poorest parts of the world
• A duty to do good – volunteering is an example of this, where one does not have to do that thing, but chooses to.

Hartman, DesJardin and MacDonald (2015, p.4) define business ethics as “a process of responsible decision making”.

They too commented that historically business ethics has been viewed as a contradiction (oxymoron) and something that interferes with the efficient running of a business.

Ethical leadership in business’ aim is to “create the circumstances within which good people are able to do good and bad people are prevented from doing bad” (p.12)

Business ethics and social responsibility

Chryssides & Kaler (p. 12, 1993) note:

Business ethics, like ethics in general, is centrally concerned with conduct.

It essentially questions about whether we ought or ought not to perform certain kinds of actions; about whether those actions are good or bad, right or wrong, virtuous or vicious, worthy of praise or blame, reward or punishment.

Consequently…the point of the exercise is to resolve questions of conduct.

Why is Business Ethics Important

If business ethics addresses issues of right and wrong in decision making, how do we decide what is right and what is wrong?

And how does this relate to the law, which also tells us what is right and what is wrong?

One view is that the law is the minimum acceptable standard.

However some issues are not legislated for – this is where ethics often starts.

Why is it important?

• Being (seen to be) ethical can be good for business.
• Business has an increasing influence in society.
• It has the potential to contribute to society – should it do so ethically or not?
• Business malpractice is damaging to individuals, organisations and society
• Stakeholders require a more ethical approach

Corporations have Social Responsibilities

Here’s why a corporation can be responsible for its actions:

• Corporation as legal as well as moral entity?
• Bakan (2004) – corporation as unfeeling psychopath?
• Agency – a corporation acts without links to an individual
• Organisation’s framework for decisions overrides individual responsibility

Why might corporations have social responsibilities?

• Enlightened self interest – alternative is boycotts e.g. ExxonMobil
• It is attractive to employees?
• Davies’ (1968) argument – voluntary compliance better than legislation
• Contribution to society to make safer, better educated, more equitable community
• Proof of motive?

More moral arguments for Social Responsibility

• Corporations cause social problem – pollution
• Access to substantial resources – major impact
• Corporate activities have social impact
• Corporations need stakeholders, not mere shareholders…
• Enlightened self interest: the corporation takes on social responsibilities to promote self interest

‘Grey’ Areas

It can cover a range of issues: responsibilities for health, safety, ‘fairness’; consultation within the firm; to nearby communities, to the country or countries within which the firm operates or the world egg CO2 emissions; to suppliers – how far down the supply chain should responsibility go?

Some definitions are broader or looser than others.

Corporate Social Responsibility (CSR)

“Corporate responsibility (CR), also known as corporate social responsibility (CSR) or business sustainability, addresses the ethics of an organisation’s activities and how it operates in a way that is viable over the long term. These two factors are intrinsically linked, as a business that damages the systems on which it depends will ultimately be unsustainable.”

Read more on Corporate Social Responsibility (CSR)

Individual and corporate responsibility

Limited liability companies are given a legal personality distinct from that of the managers.

For a sole proprietorship responsibility is strictly individual. Ethics are very personal.

There is debate over how far top managers in public liability companies are personally responsible for harmful effects such as major industrial accidents.

Corporate Citizenship and Globalisation

• How far is the notion of corporate citizenship too vague to be of much use?
• Is it of decreasing relevance as firms become more multinational?
• Does citizenship need to be seen in more ethical-cultural terms …Islamic finance (no interest)
• How far can and is a sense of ‘global citizenship’ developing?

Legal responsibilities of companies

Laws on health & safety, equal opportunities & discrimination, employment and commercial contracts; taxes, pollution, packaging.

Disclosure of information: depends partly on the type of firm- more expected of a limited liability company than a sole proprietorship.

Corporate governance

Term arose perhaps from separation of ownership shareholders from control senior management (Berle & Means, 1932)

There were a range of financial scandals e.g. Maxwell, BCCI, Enron

Investing is risky but information and warning signals need to be given; integrity of market analysts who recommended buy to Enron and World com till days before the crash.

But pressure on executives to deliver profits every half year.

Concept of transparency – accountability and explanation to outsiders of the workings of a firm (W. Scarff’s definition).

Developments in corporate governance:

• Cadbury 1992: Increased use of non executive directors to counter internal untrustworthiness
• Greenbury 1995: Examination of director pay; not linked to share price; stock options used as part of pay package
• Hampel and combined code 1998: Board has responsibility for relations to stakeholders but director responsibility is to shareholders
• Turnbull 1999: Audit controls
• OECD principles 1999 – like combined codes: Combined code via London Stock Exchange: corporate governance practices for listings
• Myners 2001: Role of institutional investors – activism against directors needed, but little change

• Sarbanes-Oxley Act of 2002 (USA):

  Comply or explain – requirements on chief executives for personal signing off of accounts
  Andersen’s, Enron’s auditors made as much non-audit income from Enron as from audit – loss of independence?

• Smith & Higgs and combined code 2003: Higgs – roles of non executive directors. Smith – role of audit committees

• Issues with Enron:

  Where were the (NEDs) non executive directors?
  NEDs occasional attendance
  NEDs are also executive directors of their own companies. Are they thus really trustworthy?

However, the ground reality is that there’s little change but many reports.

Fisher and Lovell (2006, p.307) offers an expanded definition of corporate governance.

King 2002 – companies should no longer act independently of the societies and environment in which they operate:

UN Global Compact

Three categories:

• Human rights
• Labour
• Environment

This was a voluntary code but in 2004 the need for government support was recognised – Christian Aid has been highly critical of this UN initiative.

Justifications for breaking the rules:

• The activity is within reasonable ethical and legal limits
• The activity is in the individual’s or the corporation’s best interests – that the individual would somehow be expected to undertake the activity
• A belief that the activity is ‘safe’ because it will never be found out
• A belief that because the activity helps the company, the company will condone it and even protect the person who engages in it
• Can you think of an example of each of the above?

Demand and supply for SR varies across topics and countries

Demands for social responsibility are multiple: less pollution (but there are several types of pollution), better treatment of workers in developing countries (wages, working conditions, use of child labour etc.); more sustainable use of finite resources e.g. fish, forests, agricultural land.

How far should Social Responsibility extend into society or a nation?

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