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Ferrell, O.C., Fraedrich, J., & Ferrell, L.,

Business Ethics: Ethical Decision Making and Cases
Chapter 1,2

The Importance of Business Ethics

Stakeholder Relationships, Social
Responsibility, and Corporate Governance
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The Importance of Business Ethics

CHAPTER OBJECTIVES
• Explore conceptualizations of business ethics from
an organizational perspective

• Provide evidence that ethical value systems support

business performance

• Gain insight into the extent of ethical misconduct in

the workplace and the pressures for unethical
behavior
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Business Ethics
• Morals refer to a person’s personal philosophies
about what is right or wrong.

• Business ethics comprises organizational principles,

values, and norms that may originate from
individuals, organizational statements, or from the
legal system that primarily guide individual and
group behavior in business.
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Business Ethics
• Principles are specific and pervasive boundaries for
behavior that should not be violated. Principles
often become the basis for rules.

• Values are enduring beliefs and ideals that are

socially enforced.

• Norm is standards of proper or acceptable

behaviors.
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Business Ethics
• Ethics is defined as
behavior or decisions Values and judgments
made within a group’s play a critical role
values. when we make ethical
• Business Ethics is decisions.
decisions made by
groups of people that Businesses must balance their
represent the business desire for profits against the
organization needs and desires of society.
(judgments).
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Problems cited as evidence of declining ethical standards:

• Misuse of company resources
• Abusive behavior
• Harassment
• Accounting fraud
• Conflicts of interest
The more successful
• Defective products
a company,
• Bribery
the more the public
• Employee theft is critical!
• Etc.
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Studying business ethics will help companies:

• to identify ethical issues when they arise
• and recognize the approaches available for
resolving them.
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Stakeholder Relationships, Social Responsibility,

and Corporate Governance

• CHAPTER OBJECTIVES
o Identify stakeholders’ roles in business ethics
o Define social responsibility
o Examine the relationship between stakeholder
orientation and social responsibility
o Delineate a stakeholder orientation in creating
corporate social responsibility
o Explore the role of corporate governance in structuring
ethics and social responsibility in business
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Stakeholder Framework
• Business exists because of relationships.
• A stakeholder framework identifies
o the internal stakeholders (employees, boards of directors,
and managers),
o the external stakeholders (customers, special interest
groups, regulators, and others)
who agree, collaborate, and engage in confrontations on
ethical issues.
• This framework allows an organization to identify,
monitor, and respond to the needs, values, and
expectations of different stakeholder groups.
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The 3 approaches to stakeholder theory

• The normative approach identifies ethical guidelines that
dictate how firms should treat stakeholders.
• The descriptive approach focuses on the actual behavior of
the firm and usually addresses how decisions and strategies
are made for stakeholder relationships.
• The instrumental approach to stakeholder theory describes
what happens if firms behave in a particular way.

The ability to create value for all primary

stakeholders and attempt to do this
by not favoring one group over the others.
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STAKEHOLDERS and ETHICAL ISSUES IN BUSINESS

• Many firms experience conflicts with key

stakeholders and consequently damage their
reputations and shareholder confidence.
• Ethical misconduct and decisions that damage
stakeholders generally impacts the company’s
reputation in terms of both investor and consumer
confidence.
• Stakeholders provide resources critical to a firm’s
long-term success.
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Identifying Stakeholders
Primary stakeholders:
• Employees
• Customers
• Investors
• Shareholders
• The governments
• Communities.

Secondary
stakeholders:
• The media
• Trade associations
• Special interest
groups.
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A Stakeholder Orientation
• Activities and processes within a system of social institutions that
facilitate and maintain value through exchange relationships with
multiple stakeholders.

• The 3 set of activities:

o the organization-wide generation of data:
• identifying the stakeholders relevant to the firm
• characterize the concerns about the business’s conduct each
relevant stakeholder group shares (from formal research, including
surveys, focus groups, Internet searches, and press reviews).
• evaluate their impact on the issues.
o the distribution of this information throughout the firm;
o the responsiveness of the organization as a whole to this information.

Generation of Distribution Responsiveness

data of this
information
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SOCIAL RESPONSIBILITY AND ETHICS

• Social responsibility is an organization’s obligation to maximize its
positive impact on stakeholders and minimize its negative impact.
• Business ethics involves carefully thought-out rules or heuristics of
business conduct that guide decision making.
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Corporate citizenship
• Corporate citizenship is to express the extent to
which businesses strategically meet the economic,
legal, ethical, and philanthropic responsibilities
placed on them by various stakeholders.
o strong sustained economic performance
o rigorous compliance
o ethical actions beyond what the law requires
o voluntary contributions that advance the reputation and
stakeholder commitment of the organization.
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ISSUES IN SOCIAL RESPONSIBILITY

• A broader view of social responsibility looks beyond
pragmatic and firm-centric interests and considers
the long-term welfare of society.
• 4 general categories:
o Social issues: jobs lost through outsourcing, abortion, gun
rights, and poverty, obesity, smoking, and exploiting
vulnerable or impoverished populations, Internet tracking
and privacy
o Consumer protection: unfair and deceptive business
practices (advertising, disclosure, financial practices, and
product safety)
o Sustainability
o Corporate governance
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CORPORATE GOVERNANCE PROVIDES FORMALIZED

RESPONSIBILITY TO STAKEHOLDERS
• Corporate governance is the development
of formal systems of accountability, over-
sight, and control.
• Strong corporate governance mechanisms
remove the opportunity for employees to
make unethical decisions.
• Socially responsible by stakeholders also
serve to enhance the firms’ profitability.

END WEEK 1