Overview: Business Ethics

What It Means

Business ethics are the moral values or principles that play a role in shaping the business practices of companies or individuals. The question of business ethics addresses a wide range of concerns, both within and outside a company. On one hand companies contend with ethical issues as they engage in their own day-to-day operations. Ethical concerns often guide the ways that company owners treat their employees, as well as the manner in which employees approach the performance of their jobs. At the same time, ethical concerns play a large role in the ways that companies interact with other companies, consumers, and society as a whole. The business practices of companies inevitably have some sort of impact, either positive or negative, on the world around them. If a company’s actions have a negative impact on others (for example, when a company engages in unfair competitive practices to drive rival companies out of business or when a company creates a misleading marketing campaign to convince consumers to buy a product they do not need or that might actually be harmful), the business ethics of that company can be viewed as questionable.

At the center of most debates concerning business ethics are the dual, often conflicting issues of legality and fairness. In some cases a company that operates within the confines of the law is not necessarily acting in an ethical manner. For example, when a company decides to lay off a large sector of its workforce to increase shareholder profits, that decision can have a far-reaching, negative impact, not only on the company’s unemployed workers but also on the workers’ families, as well as on the community where they live. In other cases a company’s manufacturing process might release pollution into the environment. While a company’s pollution levels might conform to standards established by law, the pollution might still pose a health hazard to people living near its source. Technically a company has a right to make its own personnel decisions or to produce acceptable levels of industrial pollution or waste, regardless of how those decisions affect the lives of its employees or the city or town where they do business. When companies engage in activities that ultimately destroy the economic health of a community or create health problems for members of that community, however, the ethics behind their practices may be questioned.

When Did It Begin

The concept of business ethics is as old as business itself. Aristotle discussed the ethical ramifications of unfair business conduct in his writings, while the Bible contains numerous prohibitions on certain business practices, including interest, or fees, for lending money. In his De Officiis (44 bc ) the Roman statesman Cicero (106–43 bc ) asserted that, in the conducting of business, people should prioritize the welfare of the community over personal profit. Throughout the Middle Ages (c. 500–c. 1500) Christian societies were deeply concerned with questions of fairness in business dealings, particularly in the buying and selling of goods; Saint Thomas Aquinas (1225–74) argued in the Summa Theologica (1265–74) that selling goods for profit is immoral.

In the United States the emergence of modern business ethics traces its beginnings to the political activism of the 1960s. As large portions of the American public became more concerned with issues of social equality, they began to question the balance of power in the United States, both in the political and economic spheres. In the eyes of many people during this period, large corporations represented the interests of the wealthy and powerful, at the expense of the larger population. As companies came under more intense scrutiny, they began to reevaluate their business practices, trying to regain the public trust. At the same time, this shift toward more ethical business conduct was driven by legislation. The Civil Rights Act of 1964, which prohibited racial, religious, and other types of discrimination, forced companies to develop new hiring practices that offered equal opportunities to all job applicants. In 1969 the Environmental Protection Act mandated that corporations adhere to strict standards concerning industrial pollution and waste disposal; in 1970 the Occupational Safety and Health Act made companies responsible for safeguarding employee safety. The Council on Economic Priorities, an organization dedicated to evaluating the social and environmental impacts of corporate policies in the United States, was founded in 1969. Eventually the U.S. Congress began to pass laws that applied to corporations that conducted business overseas. One notable example was the Foreign Corrupt Practices Act of 1977, which prohibited U.S. companies from contributing money to foreign governments in exchange for favorable treatment.

More Detailed Information

All companies confront intense pressures to succeed in a competitive business world. In a capitalist economy the most fundamental indication of a company’s success is its profitability. A company’s net income, or the amount of money it has left over after deducting all operational expenses, is commonly known as its bottom line. If a company fails to meet its bottom line, it must consider making serious changes to its business strategy or else run the risk of going out of business. For example, if demand for a certain product the company manufactures suddenly decreases or if shortages in natural resources lead to a more widespread economic downturn (also known as a slump), a company might be forced to lay off part of its workforce or seek out cheaper materials to use in the manufacturing of their products. This is sometimes known as the cost of doing business.

In an extremely competitive economy, however, a company will sometimes seek out other ways to gain advantages over its rivals and possibly cross the line into unethical behavior in the process. For example, a pharmaceutical company might willingly mislead consumers regarding the safety of a medication it is trying to market. Such a practice is commonly known as misbranding. A well-publicized case of drug misbranding made headlines in May 2007, when Purdue Pharma, an American pharmaceutical company based in Stamford, Connecticut, pleaded guilty to lying about the addictive potential of one of its products, OxyContin, a powerful painkiller. The case revealed that, during its original marketing campaign for OxyContin, the company deliberately misled federal agencies, medical professionals, and consumers about the drug’s potency. The company had powerful financial incentives to do so; soon after the drug’s launching in 1996, annual sales of OxyContin exceeded $1 billion per year. While the medication generated high profits for Purdue Pharma, it also wreaked a heavy toll on patients who used the drug, and by the year 2000 widespread instances of addiction and abuse began to emerge. As a result of the guilty verdict in 2007, Purdue Pharma was required to pay more than $600 million in fines, while three former executives of the company were ordered to pay an additional $34.5 million.

In other instances a company might behave unethically by allowing its pollution levels to exceed those mandated by the Clean Air Act of 1990. Sometimes a company will ignore pollution requirements because it has determined that it is more profitable to pay the resulting fines than it is to invest in cleaner manufacturing technologies or to scale back its operations to comply with the law. In other cases a company will conceal the extent to which it pollutes the environment or the level of harm this pollution inflicts on the community. One of the most notorious corporate polluters of the late twentieth century was the General Electric Company, an American technology firm. From the 1970s into the twenty-first century, General Electric was ordered to pay more than a billion dollars in fines relating to the pollution or contamination of water, soil, and other violations of the Environmental Protection Act. Indeed General Electric’s ethical breaches were not limited to environmental violations, and the company also incurred heavy fines related to defrauding government agencies, knowingly selling defective products, and other unethical actions.

In some cases corporate polluters avoid paying large fines through lobbying (the concerted effort to influence politicians to support, oppose, or modify certain legislation, according to the interests of the lobbying party) or by simply ignoring legal mandates they know will be costly and time consuming for officials to enforce. When a company’s reputation becomes tarnished by a long history of repeated environmental violations, however, the company will sometimes try to distance itself from its past reputation by marketing a new image. In 2005, for example, General Electric launched its “ecomagination” campaign, a publicity strategy aimed to coincide with its decision to begin producing and marketing products that were environmentally friendly (products or processes that have little to no negative impact on the environment).

Economists differ widely on the subject of what constitutes ethical behavior in the business world. Some experts, notably American economist Milton Friedman (1912–2006), have argued that a corporation’s sole ethical obligation is to its shareholders. In Friedman’s view a company is entitled to take whatever actions are necessary to increase its profitability. Other experts, however, have contended that, while this “bottom-line” mentality might bring large dividends to shareholders in the short term, over the long term it can inflict a far greater negative impact on the company’s future, by either undermining its public reputation, exhausting human and environmental resources necessary for future growth, or creating troublesome legal issues for the company.

Recent Trends

With the rise of multinational corporations during the 1990s, the question of business ethics began to extend across international borders. In response to the new challenges raised by a global economy, in 1996 the International Trade Administration, a branch of the U.S. Department of Commerce, created the Best Global Practices Program as a means of promoting a set of ethical guidelines for American companies conducting business overseas. These guidelines, which became known as the Model Business Principles, were intended to address such issues as fair labor practices, workplace safety, environmental impact, and fair competition as they related to businesses operating abroad.