Business ethics and its importance

Business ethics is the aspect of corporate governance - has todo with the moral values of managers encouraging them to betransparent in business dealing.

Good business ethics is the backbone of every forwardthinking business. It helps to understand the reason, itsimplications and how to address the situation.

Business malpractices have the potential to inflict enormous harm on individuals, communities and environment.

The demands being placed on business to be ethical by itsvarious stakeholders becoming more complex. Business ethicsprovides the means to appreciate and understand thesechallenges more clearly, in order that firms can meet theseethical expectations more effectively.

Help to improve ethical decision making with the appropriateknowledge and tools to allows the managers to correctlyidentify, diagnose, analyse and provide solutions to the ethicalproblems and dilemmas they are confronted with.

Further refer:(1)Business ethics and the evolution of corporate responsibility; GaelMcDonald, Chartered Accountant Journal March, 2007;(2)Business ethics, Andrew Crane, Oxford third edition, 2010

Stakeholder theory

It is not merely striving to maximization profits for shareholders, acorporate should balance the interests of shareholders against theinterests of other corporate stakeholders, such as employees,suppliers, customers and the community.

Traditional management model managers have a fiduciaryrelationship with shareholders to act in their interests.

Stakeholder theory provide a compelling reason why other groupsalso have a legitimate claim on the corporation. (welfare, rights).

Further refer to articles (1)Business ethics: the state of the art, Patricia H.Werhane,IJMR March 1999; (2) Business ethics and the evolution ofcorporate responsibility; Gael McDonald, Chartered Accountant JournalMarch, 2007

Definition of stakeholders

Freeman- can affect or is affected by the achievement ofthe organisations objectives.

Evan and Freeman benefit from or are harmed by andwhose rights are violated or respected by, corporateactions.

Clarkson have or claim, ownership, rights or interests ina corporation and its activities.

Stakeholders-traditional management model

Corporation

Shareholders

Suppliers

Customers

Employees

Reference: Business ethics, Andrew Crane, Oxford third edition, 2010

Stakeholder model

Corporation

Shareholders

Suppliers

Civil society

EmployeesGovernment

Customers

Competitors

RIGHTS THEORY

Rights theory which is a deontological theories-theories thatfocus on decisions or actions alone.

Eg: a deontological theory may find unacceptable that anycompetent employees loses his job, even if the layoffs effect isto reduce prices to consumers and increase profit.

It also holds that certain humans rights are fundamental andmust be respected by other humans. Each of us faces a moralcompulsion not to harm the fundamental rights of others.

Strength and criticisms Strength of Right Theory -It protects fundamental rights unless some

greater right takes precedence. E.g. members of modern democraticsocieties have extensive liberties and rights that they need not fearwill be taken away by their government or other members of society.

Criticisms of Right Theory It is difficult to achieve agreement aboutwhich rights are protected. E.g. rights fundamental to women in USare severely restricted in countries like Pakistan or Saudi Arabia.

Right theories does not concern with the costs or benefits.

It promotes moral fanaticism and creates a sense of entitlementreducing entrepreneurship and production. E.g. I am entitled to a job,a place to live/food and health care regardless of how hard I work,how motivated am I to work to earn those things?

JUSTICE THEORY

Justice theory which has concepts common to right theory, butfocus primarily on outcomes.

John Rawls A Theory of Justice Rawls reasoned that it wasright for governments to redistribute wealth in order to helpthe poor and disadvantages. He argued for a just distribution ofsocietys resources by which a societys benefits and burdensare allocated fairly among its member.

Each person has an equal right to basic rights and liberties.

Justice theory (cont)

Application Rawls theory in the business context- justicetheory requires decision makes to be guided by fairness andimpartiality.

It holds that businesses should focus on outcomes: arepeople getting what they deserve?

Strengths and Criticism

The protection of those who are least advantaged in society.

Its motives are consistent with the religious and secularphilosophies that urge humans to help those in need. Manyreligions and cultures hold basic to their faith the assistance ofthose who are less fortunate.

Criticisms it treats equality as an absolute without examiningthe costs of producing equality including reduced incentives forinnovation, entrepreneurship and production. Any attempt torearrange social benefits requires an accurate measurement ofcurrent wealth.

UTILITARIANISM

Utilitarianism moral theory to maximise the total of welfareamong everyone affected by what we do.

Jeremy Bentham and John Stuart Mill.

The basic principle of utilitarianism could be defined as:

According to utilitarianism, an action is morally right if it results in thegreatest amount of good for the greatest amount of people affected bythe action.

an action is right if and only if in the situation there was noalternative to it which would have resulted in a greater sum total ofwelfare in the world.

Utilitarianism

It also called the greatest happiness principle it focuses solely on:-

(i) the consequences of an action;

(ii) weights the good results against the bad results;and

(iii) encourages the action that results in the greatestamount of good for all people involved.

Utilitarianism

It requires a decision maker to maximize utility for society as awhole.

Maximizing utility means achieving the highest level ofsatisfactions over dissatisfactions (on society as a whole-thedecision maker may be required to do something that harmsher by her action in order to benefit the society as a whole).

It also judges our actions as good or bad depending on theirconsequences the end justify the means.

Strengths & criticism

You merely need to do what is the best for society as a whole.

U.S. by focusing on total social satisfactions, benefits, welfareand wealth not on the allocations of pleasures and pains,satisfactions and dissatisfactions and wealth.

It is difficult to measure ones own pleasures/satisfaction andpain/dissatisfaction.

Those benefits certainly are unequally distributed acrosssocietys members.

Profit Maximization

Requires a decision maker to maximize a businesss long-runprofits within the limits of the law.

Based in the laissez faire theory of capitalism by Adam Smith.

By focusing on results maximizing total social welfare.

Profit maximization optimizes total social utility by requiring thedecision maker to make a decision that merely maximizesprofits for himself or organisation.

Strengths

Ones selfish interest by working in our own interests, wecompete for societys scarce resources (labour and land) whichare allocated to those people and businesses that can use themmost productively.

By allocating societys resources to their most efficient uses, asdetermined by a free market, we maximise total utility orbenefits.

If we fail to maximize profits, some of societys resources will beallocated to less productive uses that reduce societys totalwelfare.

Profit maximization results in ethical conduct societys member toact within the constraints of the law.

A decision maker to consider the rights protected by rights theoryand justice theory.

Ignoring important rights of employees, customers, suppliers,communities and other stakeholders may negatively impact acorporations profit.

A business that engages with unethical behaviour is subject toboycotts, adverse publicity, demands for more restrictive laws.

criticisms

Subject to human failings that make it impossible for them tomaximize corporate profits.

The failure to discover and process all relevant information andvarying levels of aversion to risk can result in one managermaking a different decision than another manager.

Even if the profit maximazation results in an efficient allocation it does not concern itself with how wealth is allocated withinsociety.

To some people, wealth disparity is unacceptable.

To liberal economists, wealth disparity is necessarycomponent of a free market that rewards hard work, acquiredskills, innovation and risk taking. (ability to compete).

Ability of laws and market forces to control corporatebehaviour is limited because it requires lawmakers,consumers, employees and others to detect unethicalcorporate act and take appropriate steps.

EGOISM

Utilitarianism makes unreasonably strict demands on us,according to one line of argument if we follow the argumentto its most extreme conclusion, we end up with ethicalegoism.

According to ethical egoism, we have no duties to anyone butourselves. This does not mean that the entire world ought tosatisfy my interests.

Every individual ought to maximise his or her own welfare.

You act wrongly whenever you do not maximise your ownbest interests.