Business Ethics

Week 1

What is ethics?

• The study and philosophy of human conduct, with an emphasis on determining right and wrong.

• Ethics is the study of what needs to be considered as norms within a society

• Rules and norms are important for all type of human relationships

• Values and judgments play a critical role when we make ethical decisions.

Business Ethics

• Business ethics relate to rules, standards, and moral principles regarding what is right or wrong in specific situations.

• For our purposes, business ethics comprises the principles, values, and standards that guide behavior in the world of business.

Principles and Values

• Principles are specific and pervasive boundaries for behavior that are universal and absolute.

• Principles often become the basis for rules. Some examples of principles include freedom of speech, fundamentals of justice, and equal rights to civil liberties.

• Values are used to develop norms that are socially enforced. Integrity, accountability, and trust are examples of values.

Importance of Business ethics • In recent years, a number of well-publicized scandals resulted in

public outrage about deception and fraud in business and a demand for improved business ethics and greater corporate responsibility.

• The global financial crisis took a toll on consumer trust of financial services companies. A study of 650 U.S. consumers by Lightspeed Research and Cohn & Wolfe revealed that 66 percent of respondents did not feel that the financial services industry would help them to regain the wealth that they lost during the recession.

• Words used to describe this industry included greedy, impersonal, opportunistic, and distant.

Importance of Business Ethics

• According to another poll by Deloitte and Touche of teenagers aged 13 to 18 years old, when asked if people who practice good business ethics are more successful than those who don’t, 69 percent of teenagers agreed.

• If profits are realized through misconduct the life of the organization may be shortened.

• Many firms, including Lehman Brothers and Enron, that made headlines due to wrongdoing and scandal ultimately went bankrupt or failed because of the legal and financial repercussions of their misconduct.

Why study business ethics?

• Studying business ethics will help you begin to identify ethical issues when they arise and recognize the approaches available for resolving them.

• You will also learn more about the ethical decision making process and about ways to promote ethical behavior within your organization.

• By studying business ethics, you may begin to understand how to cope with conflicts between your own personal values and those of the organization in which you work.

Declining Ethical standards

• Abusive behavior, • harassment, • accounting fraud, • conflicts of interest, • defective products, • bribery, and • employee theft

are all problems cited as evidence of declining ethical standards.

Corporate scandals

• Scandals in the corporate world made business ethics an important area of study

• Tyco International is a diversified manufacturing conglomerate that deals with electronic components, health care, fire safety, security, and fluid control with headquarters in New Jersey, USA. In 2005, its CEO Dennis Kozlowski and CFO Mark H. Swartz were found guilty of stealing $600 million from the company. These two symbolized the excesses of executive compensation at shareholder’s expense, where Kozlowski will be remembered for the $2 million birthday bash he gave his wife on a Mediterranean Island at the company’s expense.

Some examples

• Parmalat, an Italian company, is the leading global producer of Ultra Hot Temperature (UHT) milk and other foods. However, its founder, Calisto Tanzi was accused of questionable accounting practices in 2003 when a €14 billion hole was discovered in the company’s accounting records. This resulted in one of the biggest corporate scandals in history as he was selling credit-linked notes to the company and diverting the company’s funds elsewhere.

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Adelphia Communications Corp

• was ranked as the fifth largest cable company in the US before it yielded to bankruptcy in 2002 due to internal corruption. The company incurred $2.3 billion debt and its founders were charged with securities violations. John and Timothy Rigas were sentenced to 15 to 20 years in prison, while five other officers were indicted. The Rigases made a complicated cash-management system where they diverted funds to other family-owned entities.

System or the agent?

• Who is responsible for the bad behaviour?

System or the agent?

• A Junior Achievement/Deloitte survey of teens showed that 71 percent feel prepared to make ethical decisions in the workplace.

• However, of those surveyed, 38 percent feel it is sometimes necessary to lie, cheat, plagiarize, or engage in violence to succeed.

The Ring of Gyges

• The Ring of Gyges is a mythical magical artifact mentioned by the philosopher Plato in book 2 of his Republic (2.359a–2.360d).

• It granted its owner the power to become invisible at will. Through the story of the ring, Republic considers whether an intelligent person would be moral if he did not have to fear being caught and punished.

Why do we behave morally?

• Fear?

• Benefit?

• Principles?

Stakeholder Theory

• Stakeholder theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization.

• It was originally detailed by R. Edward Freeman in the book Strategic Management: A Stakeholder Approach, and identifies and models the groups which are stakeholders of a corporation, and both describes and recommends methods by which management can give due regard to the interests of those groups.

Stakeholders

• In a business context, customers, investors and shareholders, employees, suppliers, government agencies, communities, and many others who have a “stake” or claim in some aspect of a company’s products, operations, markets, industry, and outcomes are known as stakeholders.

Stakeholder Theory

• A stakeholder framework helps identify the internal stakeholders such as employees, boards of directors, and managers and external stakeholders such as customers, special interest groups, regulators, and others who agree, collaborate, and have confrontations on ethical issues.

• Most ethical issues exist because of conflicts in values and belief patterns about right and wrong between and within stakeholder groups.

• This framework allows a firm to identify, monitor, and respond to the needs, values, and expectations of different stakeholder groups.

Stakeholders

Stakeholders apply their values and standards to many diverse issues;• working conditions • consumer rights• environmental conservation • product safety • proper information disclosure

Power of Stakeholders

• Shareholders supply capital; suppliers offer material resources or intangible knowledge; employees and managers grant expertise, leadership, and commitment; customers generate revenue and provide loyalty and positive word-of-mouth promotion; local communities provide infrastructure; and the media transmits positive corporate images.

• Stakeholders’ ability to withdraw—or to threaten to withdraw—these needed resources gives them power over businesses.

Nike case

• Nike experienced a backlash from its use of offshore subcontractors to manufacture its shoes and clothing.

• When Nike claimed no responsibility for the subcontractors’ poor working conditions and extremely low wages, some consumers demanded greater accountability and responsibility by engaging in boycotts, letter-writing campaigns, and public service announcements.

• Nike ultimately responded to the growing negative publicity by changing its practices and becoming a model company in managing offshore manufacturing.

Identifying Stakeholders

• Primary and secondary stakeholders

• Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival. These include:

• Employees• Customers• investors and shareholders, • the governments and communities that provide

necessary infrastructure.

Secondary stakeholders• Secondary stakeholders do not typically engage in transactions with

a company and thus are not essential for its survival. These include: • the media• trade associations• special interest groups.

The American Association of Retired People (AARP), a special interest group, works to support retirees’ rights such as health care benefits.

Both primary and secondary stakeholders embrace specific values and standards that dictate what constitutes acceptable or unacceptable corporate behaviors.

stakeholder orientation

• The degree to which a firm understands and addresses stakeholder demands can be referred to as a stakeholder orientation.

This orientation comprises three sets of activities: (1) The organization-wide generation of data about stakeholder

groups and assessment of the firm’s effects on these groups(2) The distribution of this information throughout the firm, and(3) the organization’s responsiveness as a whole to this intelligence.

“the basic mission of business [is] thus to produce goods and services at a profit, and in doing this, business [is] making its maximum contribution to society and, in fact, being socially responsible.” Milton Friedman

Invisible hand vs. ethical regulation

• A governance system that does not provide checks and balances creates opportunities for top managers to put their own self-interests before those of important stakeholders. While many people lost their investments, some CEOs were able to profit off of the latest recession, even as their companies and shareholders fared poorly.

• Some directors even tweaked performance targets in order to make goals easier to achieve so that they could receive more bonus money.

• Bonuses have become a very contentious issue—as they are the part of an executive’s pay most tied to performance. Many people are asking why executives continue to receive bonuses as their companies fail, but most of the time bonuses are tied to targets other than stock prices.