Caveat emptor. This ancient Latin proverb, let the buyer beware, tells us that business ethics has been a societal concern going back a long ways indeed. Richard T. De George, a distinguished student of the subject, dates the modern interest in business ethics to the 1960s when changing attitudes toward business began to manifest in environmental concerns, the rise in consumerism, and criticism of multinationals—and large corporations began to embrace the idea of social responsibility as a business value. Since that time business ethics has also been associated with civil rights, women's rights, the international fight against Apartheid, and many other issues on which Moral Man and Immoral Society (title of a book by Reinhold Niebuhr, the theologian) collide.
Webster's defines ethics as "the discipline dealing with what is good and bad or right and wrong or with moral duty and obligation." (Unabridged, 1961.) The word derives from the Greek word meaning "moral," a Latin word with roots in "mores" or "customs"—in other words the values held by society. Ethicists point out that law represents an ethical minimum and that ethical behavior is something more than being within the law. Individuals—and by extension institutions—obtain their values from religion, philosophy, culture, law, and the special requirements of particular professions. An individual may hold that morality is absolute (what is wrong is always wrong) or may hold that morality is relative (the good is defined in part by other factors). In either case, all but the tiniest minorities assert that good and bad exist and can be determined. Very sophisticated theories exist which assert a hierarchy of good even when morality is held to be absolute; thus, for instance, lying is always wrong, but to lie to save the life of a fugitive Jew during the Nazi era was good: it prevented a worse evil. Given these definitions, business ethics is at minimum something more than operating a business under existing laws; the values to be applied arise from values currently held by society; but the ethics a company may define as its own may hold to an even higher standard.
ETHICS IN A COMPETITIVE ENVIRONMENT
The key difficulty surrounding business ethics is that ethics, by definition, goes beyond the merely legal—but how far beyond? No institutionalized rules exist defining an upper limit. Public opinion is not a very good guide. It is subject to change. Opinions even on environmental issues are subject to change depending on such pocket-book issues as the cost of gas. By its very nature, therefore, business ethics is embroiled in philosophical and operational difficulties.
The traditional concept of business based on Adam Smith's imagery of the market's "hidden hand" assumes that business entities bring about social goods by maximizing profits while operating within the law. Social goods are thus a by-product of market forces—not an objective assigned to corporate management to meet. This viewpoint has been long asserted by free market economists like Milton Friedman. Friedman, in The New York Times Magazine, criticized those who insisted that executives and business owners had a social responsibility beyond serving the interests or their stockholders, saying that such views showed "a fundamental misconception of the character and nature of a free economy. In such an economy, there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud."
Thus the movement to embrace social responsibility has an ambiguous character. It is not formally mandated but may be rewarded by customer and/or employee loyalty; it may also, indirectly, fend off intrusive legislation. But while it may be easy to be moral when all is going well, it gets tougher when markets shrink. An article in Nilewide Marketing ("Fat profits and slim pickings") puts the matter succinctly: "While the majority of companies claim that employees are their most important asset, they seem to act as though they can do without them, or pay the ones they have a minute proportion of the top salary."
On the face of it, the business that avoids extra costs associated with ethical behavior, and bears only costs necessary to meet the law, will be more profitable, all things equal. A more complex approach to this subject, used by many corporations, is based on the insight that high ethical values have positive consequences (in consumer acceptance, brand valuation, employee loyalty, and so on) which may be difficult to measure but are real. In line with this insight, corporations have invented the notion of a Return on Values (ROV) but find it difficult to give it a numerical expression. At the same time, there is an awareness abroad these days that corporations that set their sights no higher than bare legality may foster an environment where managers may slip across the border of legality and create disasters like the Enron bankruptcy in 2002.
BUSINESS AND EMPLOYEE VALUES
Aside from the structural problems presented by the societal roles of business, corporate policies based on well-formulated ethical principles appear to produce real benefits. A. Millage recently reported in Internal Auditor, about the findings of the "2005 National Business Ethics Survey" (NBES), conducted by the Ethics Resource Center. "Seventy percent of employees from organizations with a weak ethical culture," wrote Millage, "reported observing at least one type of ethical wrongdoing, whereas only 34 percent of employees from organizations with a strong ethical culture said they have witnessed misconduct." Problems listed included abusive or intimidating behavior toward employees; lying to employees, customers, vendors, or the public; violations of safety regulations; misreporting of time worked; theft; sexual harassment; and other problems. Undoubtedly such unethical activities ultimately translate into lost sales, higher turnover, and lower profits. Internally, therefore, ethical behavior is efficient, all else being equal. Whether measurable or not business ethics has a positive "ROV."
BUSINESS ETHICS IN SMALL BUSINESS
Business experts and ethicists alike point to a number of actions that owners and managers can take to help steer their company down the path of ethical business behavior. Establishing a statement of organizational values, for example, can provide employees—and the company as a whole—with a specific framework of expected behavior. Such statements offer employees, business associates, and the larger community alike a consistent portrait of the company's operating principles—why it exists, what it believes, and how it intends to act to make sure that its activities dovetail with its professed beliefs. Active reviews of strategic plans and objectives can also be undertaken to make certain that they are not in conflict with the company's basic ethical standards. In addition, business owners and managers should review standard operating procedures and performance measurements within the company to ensure that they are not structured in a way that encourages unethical behavior. As Ben & Jerry's Ice Cream founders Ben Cohen and Jerry Greenfield stated, "a values-led business seeks to maximize its impact by integrating socially beneficial actions into as many of its day-to-day activities as possible. In order to do that, values must lead and be right up there in a company's mission statement, strategy and operating plan."
Most importantly, business owners and managers lead by example. If a business owner treats employees, customers, and competitors in a fair and honest man-ner—and suitably penalizes those who do not perform in a similar fashion—he or she is far more likely to have an ethical work force of which he or she can be proud.
Di Norcia, Vincent, and Joyce Tigner. "Mixed Motives and Ethical Decisions in Business." Journal of Business Ethics. 1 May 2000.
Fandray, Dayton. "The Ethical Company." Workforce. December 2000.
"Fat Profits and Slim Pickings." Nilewide Marketing Review. 12 December 2005.
Felsher, Louise M. "Improving Workplace Ethics: How to become a better manager, employee or co-worker." Meetings & Conventions. December 2005.
Friedman, Milton. "The Social Responsibility of Business is to Increase its Profits." The New York Times Magazine. 13 September 1970.
Kaler, John. "Reasons To Be Ethical: Self-Interest and Ethical Business." Journal of Business Ethics. September 2000.
Millage, A. "Ethical misconduct prevalent in workplace." Internal Auditor. December 2005.
Torres, Nicole L. "Ethically Speaking: What are today's students learning about business ethics." Entrepreneur. December 2005.
Verschoor, Curtis C. "Benchmarking Ethics and Compliance Programs." Strategic Finance. August 2005.
Williams, David and Todd Dewett. "Yes, You Can Teach Business Ethics: A review and research agenda." Journal of Leadership & Organizational Studies. Winter 2005.
Hillstrom, Northern Lights
updated by Magee, ECDI
"Business Ethics." Encyclopedia of Small Business. . Encyclopedia.com. (July 12, 2018). http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/business-ethics
"Business Ethics." Encyclopedia of Small Business. . Retrieved July 12, 2018 from Encyclopedia.com: http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/business-ethics
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When discussing the subject of business ethics, points of view range from those who believe that ethics in business is one of the most pressing issues if companies are to ensure creditability and trust to the cynic who is of the view that the term business ethics is an oxymoron, a contradiction in terms, and that the concepts of ethics and business are inherently incompatible. In the early twenty-first century, the general public, fueled by the general media, is quick to seize upon ethical wrongdoing by both small and large companies and is anxious to spotlight ethical violations. In doing so, demands are also increasing for greater levels of accountability in business. The reality, therefore, is that the term ethics —the expectation of appropriate behavior—and business —the current mercantile environment—cannot be separated as one experiences increasing expectation of higher standards of ethical behavior in organizations.
The factors promoting ethical awareness in both business organizations and business education programs are varied. Societal expectations and tolerance of what constitutes appropriate business conduct have also broadened. For example, companies such as Nike and Reebok have had to fend off criticisms of sweatshop practices in their off-shore contract manufacturing facilities by posting their factory labor audits on the Fair Labor Association (FLA) Web site. Both consumer and shareholder attitudes toward an organization and its ethical profile are increasingly impacting on purchasing decisions and investment strategy. Examples are the consumer boycotts, as historically experienced by Nestlé, and also the growing popularity of ethical investment funds. Undoubtedly, media attention has been instrumental in highlighting ethical misdemeanors. The popular press has been littered with high-profile cases such as Enron, WorldCom, Parmalat, and Adelphi Communications, as well as the audit companies who appear to have been complicit in their oversight of the financial practices of those organizations. The potential cost of ethical violations is also a motivating factor for organizations to reassess their stance. Companies such as Ford, for example, have been subject to significant compensation claims in relation to endangering consumer welfare as a result of faulty tires used on the Ford Explorer.
Ethical violations, when made public, can have a damning effect on publicly listed companies, as supported by the efficient market hypothesis, which maintains that markets are very efficient in interpreting data and arriving at equilibrium prices. Share prices reflect publicly available information, and it appears that any unethical conduct that is discovered and publicized impacts the corporation and shareholders by ultimately lowering the value of a company’s shares for an appreciable period of time. Similarly, for unlisted companies it is assumed that when an ethical violation is made known it will erode the trust of consumers and will ultimately be reflected in diminished sales.
The relationship between ethical behavior and company performance is intriguing. More than ninety-five empirical studies have examined the effect of the relationship between ethics and corporate social responsibility on financial performance, with the outcomes being both positive and negative. Positive relationships prevailed but it is not entirely clear whether increased ethical activity leads to increased performance or, alternatively, whether higher performance provided firms with additional resources that they could devote to social and ethical activities. Furthermore, there are varying levels of ethical engagement by organizations. The first level is one of self-protection; that is, ethical behavior is promoted in order to avoid criminal liability or additional costs. The next level is reputational awareness and the associated benefits that accrue to the organization. The final level is when an organization has an interest in being ethical because it believes it is, in fact, the right thing to do; it is the way the company does business.
While it is tempting to think of business entities as the primary moral agent, business organizations are, in fact, commonly comprised of a number of individuals making decisions that may have an ethical dimension. These ethical dimensions could relate to environmental and social considerations, such as pollution; stakeholder interactions, for example, product liability; competitive dealings, for example, price collusion; employer obligations, for example, employee safety; or personal behavior, for example, conflict of interest, so it is important to realize that the ethical performance of an organization is a reflection of the individual behavior of its employees. What guides this behavior? Essentially, morality relates to principles of right and wrong and is comprised of numerous moral norms or standards. These moral expectations have a number of sources such as family, society, church, education, training, and even one’s organization or employment. This is the intellectual base one frequently refers to when faced with an ethical dilemma (the head part). Ethics is the discipline of dealing with moral duty and obligation and might be described as the practice of morality (the actual behavior part). Business ethics is, therefore, the practice of morality as it applies to business behavior.
There is extensive scholarly debate on whether moral principles apply universally, or whether ethical judgments are relative to their context. The ethical relativists assert that there is no consistency of beliefs because moral principles are relative to individual persons and cultures, so moral standards will differ between individuals, groups, circumstances, and across time. The absolutists, however, contend that there are common moral standards upon which ethical reasoning rests and that, despite variations in ethical behavior, individuals are rooted in common moral standards. In support of the absolutists, it has been suggested that because the purpose of morality is to help make social cooperation possible, moral principles are universally necessary for that to occur.
As one witnesses the differing ethical behavior being exhibited in companies it has been suggested that there are varying levels of moral development. According to Lawrence Kohlberg’s well-established stages of moral development, there are six stages of moral development that can be summarized into three levels: the preconventional level is one at which individuals are motivated by a childlike avoidance of punishment, obedience to authority, fear, and self-interest. At the conventional level, individuals are motivated by loyalty to a group or professional norms. At the highest level, postconventional, individuals have a wide view of what is right and wrong and of those who might be affected by their decisions. An individual operating at this level has broad ethical principles in place and his or her decisions are based not on the current norms of the group or standards of society, but on personal conscience grounded in these principles.
Historically the literature on business ethics has been anchored in normative philosophy and can be seen to be broadly delineated into three areas: prescriptive/hortatory literature, which attempts to sermonize and instruct the business community and education in raising ethical standards; descriptive/positive literature, which is characterized by extensive empirical research into, for example, ethical attitudes of students and business personnel; and meta ethical/analytical literature, which investigates meaning and justification relating to the corporate and individual decision-making process. Naturally, the field of business ethics is readily evolving. The colloquy on business ethics is being extended with the lexicon broadening and being claimed by related terminologies such as corporate social responsibility, stakeholder management, corporate governance, sustainability, and corporate citizenship.
SEE ALSO Corruption; Efficient Market Hypothesis; Hypothesis and Hypothesis Testing; Information, Economics of; Lying; Morality
Bowie, N. 2004. Relativism and the Moral Obligations of Multinational Corporations. In Ethical Theory and Business, eds. Tom L. Beauchamp and Norman E. Bowie, 538-544. Englewood Cliffs, NJ: Pearson Prentice Hall.
Kohlberg, L. 1969. Stage and Sequence: The Cognitive Development Approach to Socialisation. In Handbook of Socialization Theory and Research, ed. D.A. Goslin, 347-380. New York: Rand McNally.
Trevino, Linda K., and Katherine A. Nelson. 2004. Managing Business Ethics: Straight Talk About How to Do it Right. 3rd ed. Hoboken, NJ: John Wiley & Sons.
Gael M. McDonald
"Ethics, Business." International Encyclopedia of the Social Sciences. . Encyclopedia.com. (July 12, 2018). http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/ethics-business
"Ethics, Business." International Encyclopedia of the Social Sciences. . Retrieved July 12, 2018 from Encyclopedia.com: http://www.encyclopedia.com/social-sciences/applied-and-social-sciences-magazines/ethics-business
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business ethics, the study and evaluation of decision making by businesses according to moral concepts and judgments. Ethical questions range from practical, narrowly defined issues, such as a company's obligation to be honest with its customers, to broader social and philosophical questions, such as a company's responsibility to preserve the environment and protect employee rights. Many ethical conflicts develop from conflicts between the differing interests of company owners and their workers, customers, and surrounding community. Managers must balance the ideal against the practical—the need to produce a reasonable profit for the company's shareholders with honesty in business practices, safety in the workplace, and larger environmental and social issues. Ethical issues in business have become more complicated because of the global and diversified nature of many large corporations and because of the complexity of government regulations that define the limits of criminal behavior. For example, multinational corporations operate in countries where bribery, sexual harassment, racial discrimination, and lack of concern for the environment are neither illegal nor unethical or unusual. The company must decide whether to adhere to constant ethical principles or to adjust to the local rules to maximize profits. As the costs of corporate and white-collar crime can be high, both for society and individual businesses, many business and trade associations have established ethical codes for companies, managers, and employees. Government efforts to encourage companies to adhere to ethical standards include President Clinton's Model Business Principles (1995), in a program overseen by the Dept. of Commerce.
See M. Clinard and P. Yeager, Corporate Crime (1980); R. Berenbeim, Corporate Ethics (1987); C. Walton, The Moral Manager (1988); P. Baida, Poor Richard's Legacy (1990).
"business ethics." The Columbia Encyclopedia, 6th ed.. . Encyclopedia.com. (July 12, 2018). http://www.encyclopedia.com/reference/encyclopedias-almanacs-transcripts-and-maps/business-ethics
"business ethics." The Columbia Encyclopedia, 6th ed.. . Retrieved July 12, 2018 from Encyclopedia.com: http://www.encyclopedia.com/reference/encyclopedias-almanacs-transcripts-and-maps/business-ethics