MODULE 1

Introduction to Business Ethics

 Ethics in Managing
• Ethics is derived from the greek word ethikos meaning
custom or character.
• Ethics is defined as the discipline dealing with what is good and
bad and with moral duty and obligation.
• Personal ethics are referred to as the rules by which an
individual lives his or her personal life. E.g. honesty, fairness,
preventing harm to others etc.
• Accounting Ethics pertains to the code that guides the
professional conduct of accountants.
• Business Ethics is concerned with truth and justice and other
aspects like expectations of the society, fair competition,
advertising, Public Relations, social responsibility etc. in a
corporate environment.
What is ethics?
• Ethics is the branch of philosophy that focuses on morality
and the way in which moral principles are applied to
everyday life. Ethics has to do with fundamental
questions such as “What is fair?” “What is just?” “What is
the right thing to do in this situation?” Ethics involves an
active process of applying values, which may range from
religious principles to customs and traditions.
 What is Ethics?
Ethics:
• is a branch of philosophy.
• is a normative science because it is
concerned with the norms of human
conduct.
• as a science, it must follow the same rigours
of logical reasoning as other sciences.
• as a science, involves systemizing,
defending and recommending concepts of
right and wrong behaviour.
What is business ethics?
• Business ethics focuses on what constitutes right or
wrong behavior in the world of business. Corporate
business executives have a responsibility to their
shareholders and employees to make decisions that will
help their business make a profit. But in doing so,
businesspeople also have a responsibility to the public
and themselves to maintain ethical principles.
Business Ethics
• Although ethics provides moral guidelines,
individuals must apply these guidelines in making
decisions. Ethics that applies to business
(business ethics) is not a separate theory of
ethics; rather, it is an application of ethics to
business situations. Although all people have
ethical responsibilities, higher ethical standards
are imposed upon professionals who serve as
social models, such as physicians, attorneys, and
business people.
 What is Business Ethics?

Business ethics is the application of general ethical ideas to

business behaviour.

It is based on the principle of integrity and fairness and concentrates

on the benefits to the stakeholders, both internal and external.
Stakeholder includes those individuals and groups without which the
organization does not have an existence. It includes shareholders,
creditors, employees, customers, dealers, vendors, government and
the society.
 What is not Business Ethics?

1. Ethics is different from religion.

2. Ethics is not synonymous to law.
3. Ethical standards are different from cultural traits.
4. Ethics is different from feelings.
5. Ethics is not a science in the strictest sense of the term.
6. Ethics is not just a collection of values.
The Relationship Between Law and
Ethics
• The law is an expression of the ethical beliefs of
our society.
• Law and ethics are not the same thing. The
question, “Is an act legal?” is different from the
question, “Is an act ethical?” The law cannot
codify all ethical requirements. Therefore, an
action might be unethical, yet not necessarily
illegal. For example, it might be unethical to lie to
your family, but it is not necessary illegal.
The Relationship Between Law and
Ethics
• Similarly, just because an act is illegal does not
necessarily mean it is immoral. Rosa Parks was acting
illegally when she refused to give up her seat on the
bus to a white male, but that does not necessarily
mean she was acting unethically. Should an individual
obey the law even if it would be unethical to do so?
Under the theory of civil disobedience espoused by
Martin Luther King, Mahatma Ghandi and others, an
immoral law deserves to be disobeyed. Can you think
of any examples of acts that would be illegal, yet
arguably ethical? Storepicking food for a hungry
starving child , Driving faster than the posted speed
limit, Ethical but illegal would be paying ransom to save
a life. We do this because of the big picture, to prevent
the future kidnappings that might happen
Ethical Decisions in the Workplace
• Harassment
• Physical
• Emotional
• Sexual
• Misrepresenting/ Fraud
• Theft
• Customer Relations
• Whistle Blowing
Principles of Personal Ethics
• Concern and respect for the autonomy of others;
• Honesty and willingness to comply with the law;
• Fairness and ability not to take undue advantage of
others;
• Benevolence and preventing harm to any creature.
 Motivation for being ethical
• Most people want to maintain a clear conscience and
would like to act ethically under normal circumstances.
• It is natural for people to ensure that their actions do
not cause any injury, whether physical or mental to
others.
• People are obliged to obey the laws of land/countries’
constitutional laws.
• Social and material well-being depends on one’s
ethical behaviour in society.
Making an Ethical Decision

How do you deal with them?

• Address this issue first
• Determine who is effected
• What is the ethical concern of this issue
• What do others think?
Ethical Decisions
Companies need to be trustworthy and honest
• Effects Stakeholders, customers, employees, and
community
• Ethics and Business go together
Create the environment where people feel safe
enough to speak up
Get Facts
• Which solution will be for the greater good of the
company and create the least harm
• Which solution respects the rights of everyone
Ethical Dilemmas

• Conflict of interest
• Situation in which a business decision may be
influenced for personal gain.
• Honesty and integrity
• Telling the truth and adhering to deeply felt ethical
principles in business decisions.
• Whistle blowing
• Employee’s disclosure of illegal, immoral, or
unethical practices in the organization.
• Loyalty Vs truth
• Businesspeople expect employees to be loyal and
truthful, but ethical conflicts may arise.
 Why should Businesses act Ethically?

The reasons for an organization to be ethical include:

• To protect its own interest,

• To protect the interests of the business community as a whole so
that the public will have trust in it,
• To keep its commitment to society to act ethically, and
• To meet stakeholder expectations.
Why should Businesses act Ethically? (contd.)

The reasons for an organization to be ethical include:

• To prevent harm to the general public,

• To build trust with key stakeholder groups,
• To protect themselves from abuse from unethical employees and
competitors,
• To protect their own reputations,
• To protect their own employees, and
• To create an environment in which workers can act in ways
consistent with their values.
 Ethical Decision-making

Norman Vincent Peale’s and Kenneth Blanchard’s suggestions to

conduct ethical business.

• Is your decision fair?

• Is it a win-win situation for all?
• Is your decision legal? If it is not legal, it is not ethical.
 How Corporations Observe Ethics in Their
Organizations?

• Publish in-house codes of ethics to be strictly followed by all their

associates.
• Employ people with a reputation for high standards of ethical
behaviour at the top levels.
• Incorporate consideration of ethics into performance reviews.
• Give rewards for ethical behaviour.
How Corporations Observe Ethics in Their
Organizations? (contd.)

• SEBI, CII and such other organizations representing corporations

issue codes of best practices and enjoin their members to
observe them.
• IIMs and highly rated B-schools give extensive and intensive
instruction in business ethics, corporate social responsibility and
corporate governance as part of their curriculum.
• Conduct an Ethics Audit.
 Ethical Theories in Business

Ethics is a normative study, i.e., an investigation that attempts to reach

normative conclusions.

It aims to arrive at conclusions about what things are good or bad, or

what actions are right or wrong. E.g ‘companies should follow
corporate governance standards’ or ‘managers ought to act in a
manner to avoid conflict of interest.’
Ethical Normative theories include in business include:

• Consequentialist normative theory: Normative themes—egoism,

utilitarianism, Kantian ethics.

• Non-consequentialist normative theory: Non-consequentialist

normative themes—duties, moral rights, and prima facie principles
 Classification of Normative Themes in Ethics

Normative Themes

Consequentialist Non-consequentialist
(Deontological – Duty-based)

Egoism Utilitarianism Kantian ethics

Consequentialist
• In ethics, normative theories propose some principle or principles for
distinguishing right actions from wrong actions. These theories can, for
convenience, be divided into two kinds: consequentialist and
nonconsequentialist.
• According to consequentialist theories, the moral rightness of an action is
determined solely by its results. If its consequences are good, then the act is
right; if they are bad, the act is wrong. Consequentialists (moral theorists who
adopt this approach) determine what is right by weighing the ratio of good to
bad that an action will produce. The right act is the one that produces (or will
probably produce) at least as great a ratio of good to evil as any other course
of action open to the agent.
• Two Types
• Egoism
• Utilitarianism
Nonconsequentialist
• By contrast, nonconsequentialist (or deontological) theories contend that right
and wrong are determined by more than the likely consequences of an
action. Nonconsequentialists do not necessarily deny that consequences are
morally significant, but they believe that other factors are also relevant to the
moral assessment of an action. For example, a nonconsequentialist would
hold that for Kevin to break his promise to Cindy is wrong not simply because
it has bad results (Cindy’s hurt feelings, Kevin’s damaged reputation, and so
on) but because of the inherent character of the act itself. Even if more good
than bad were to come from Kevin’s breaking the promise, a
nonconsequentialist might still view it as wrong.

• KANtian theory
 Normative Themes
Egoism
• It asserts that the only moral obligation we have is to ourselves, though it does not
openly suggest that we should not render any help to others.
• contends that an act is morally right if and only if it best promotes an agent’s long-
term interests
• makes use of self-interest as the measuring rod for actions performed
• is equated with an individual’s personal interest but it is equally identified with the
interest of an organization or society
• intends to provide positive consequences to the party’s interest without considering
the consequence to the other parties
• It does not mean that an egoist may work against the interest of society. They may
be able to safeguard their interest without hurting the interest of others.
• They assert that all actions of men are self motivated by self interest. Even the act
of whistle-blowing is an attempt to take revenge or to become a celebrity.

• SPAIN HOLIDAY------ versus a teacher (Not selfish train set /car set)
 Normative Themes: Egoism (Contd.)

Philosophers distinguish between two kinds of egoism: personal

and impersonal.

• Personal egoism: One should pursue his/her long-term interest

and not dictate what others should do.
• Impersonal egoism: Everyone should follow their best long-term
interest.
Criticism:
• It is not a moral theory at all.
• It assumes that all actions of men are self motivated and It
undermines the human tendency to rise above self interest in
the times of calamities like flood, earthquake etc.
• It ignores blatant wrongdoings like bribery, pollution, gender
discrimination etc.
Psychological Egoism
• Psychological egoism, people are, as a matter of fact, so
constructed that they must behave selfishly.
• Psychological egoism asserts that all actions are selfishly
motivated and that truly unselfish actions are therefore
impossible. Even such apparently self sacrificial acts as
giving up one’s own life to save the lives of one’s children
or blowing the whistle on one’s organization’s misdeeds at
great personal expense are, according to psychological
egoism, done to satisfy the person’s own self interested
desires.
 Utilitarianism
The proponents were:

Jeremy Benthan (1748–1832)

John Stuart Mill (1806–1873)

•Utilitarian principle: An action is ethically right only if the sum total of

utilities produced by that act is greater than the sum total of utilities
produced by any other act that could have been performed in its
place.
•Ethics is the art of directing the actions of men so as to bring about
the greatest possible happiness to all those who are concerned with
these actions.
•It provides an objective means of resolving conflicts of self-interest
with the action for common good.
•The theory provides a flexible, result oriented approach to ethical or
moral decision making.
•JIO/LSD
 Utilitarianism- Criticism
• The major problem is the measurement of utility. Since
utility differs from person to person, place to place, and
time to time.
• The second problem concerns the intractability to
measurement that arise while dealing with certain benefits
and costs. E.g. how can one measure the value of life or
health?
• Lack of predictability of benefits and costs.
• Lack of clarity in defining what constitutes benefits and
what constitutes cost.
 Kantian Ethics
Proponent: Immanuel Kant (1724–1804)
• This theory introduces an important humanistic dimension to business
decisions, which is to behave in the same way that one would wish to be
treated under the same circumstances and to always treat other people
with dignity and respect.
• Stressed that action must be undertaken for duty's sake and not for some
other reason. Ethics is based on reason alone and not on human nature.
Only when we act from duty does our action have moral worth.
• Opined that the imperatives of morality are not hypothetical but
categorical. The core idea of this categorical imperative is that an action is
right if and only if it will become a universal law of conduct. It means we
must never perform an action unless we can consistently will that it can be
followed by everyone.
• Lying is an example, no matter how much good it may result from the act,
lying is always wrong.
• The theory proposes to act only in ways that one would wish others to act
when faced with the same circumstances.
• It also proposes that always treat other people with dignity and respect.
 Normative Theories of Business Ethics: Classification

Normative Theories

Stockholder Theory Stakeholder Theory Social Contract Theory

 Normative Theories of Business Ethics
Stockholder Theory
• It expresses business relationship between stock owners and their
managers running the day-to-day business of the company. As per the theory,
managers should pursue profit only by all legal, non-deceptive means.
• Also known as shareholder theory, according to which businesses are
merely arrangements in which one group of people i.e. the shareholders
advance capital to another group i.e. the managers to realize certain ends
which are beneficial to them.
• The managers are empowered to manage the capital advanced by the
shareholders and are duty bound by their agency relationship to carry on the
business exclusively for the purpose outlined by their principals.
• The theory has been summarized by Milton Friedman who asserted that
there is one and only one social responsibility of business- to use its
resources and engage in the activities designed to increase its profit so long it
stays within the rules of the rules of the game, i.e. to stay engaged in open
and free competition without deception or fraud.
Criticism of Stockholder theory
• It has been described as part of corporate law which has lost
its importance in modern times. It is regarded as impractical
and foolish by many ethicists which cannot be relied upon to
secure the common good.
• In today’s world government plays an important role in
collecting taxes from the corporates which is used henceforth
for the public good. Therefore there is no true free market in
the economy prevailing these days.
• It is based on false analogy. If government of democratic
societies have a moral justification to spend the taxpayers
money for promoting the common welfare of people without
taking their consent, it might mean, that businesses are also
justified in carrying out social welfare activities without the
consent of the shareholders. This is based on a wrong and far-
fetched assumption.
 Stakeholder Theory
• This theory argues that a corporate’s success in the marketplace
can best be assured by catering to the interests of all its stakeholders
(shareholders, customers, employees, suppliers, management and
the local community). This objective is achieved when corporations
adopt policies that ensure an optimal balance among all
stakeholders.
• It stresses that regardless of the fact whether the management
achieves improved financial performance or not, managers should
promote the interests of all stakeholders.
• It considers a firm to be an instrument for coordinating
stakeholders interests and considers managers as having a fiduciary
responsibility not only to the shareholders but all of them.
 Stakeholder Theory
• Principles that guide corporations are:
• First principle is Principle of corporate legacy-
according to this the corporation should be managed
for the benefit of its stakeholders: its customers,
suppliers, owners, employees and the local
community. The rights of these groups must be
ensured and further the groups must participate in
decisions that substantially affect their welfare.
• Second Principle is the stakeholder fiduciary
principle that asserts that management bears a
fiduciary relationship to the stockholders and to the
corporation as an abstract entity. It must act in the
interests of the corporation to ensure the survival of
the firm, safeguarding the long-term stakes of each
group.
Stakeholder Theory - Criticisms
• It is not applicable in practice by corporations.
• There is comparatively less empirical evidence to suggest a
linkage between stakeholders concept and corporate
performance.
• The major problem with this theory stems from the difficulty of
defining the concept, like who really constitutes the genuine
stakeholders. There is an expansive list of stakeholders.
• It is also argued further that intent of the theory is better
achieved by relying on the hand of management to deliver
social benefit where it is required rather than suggesting a wide
range of stakeholders.
• Stakeholder model also stands accused of opening up a path
to corruption and chaos; since it offers opportunity to divert
wealth away from shareholders.
• It can also be criticized on the ground that it extends the rights
of the stakeholders far too much.
 Social Contract Theory

• This is based on the principles of “social contract”, wherein it is assumed

that there is an implicit agreement between the society and any created entity
such as a business unit, in which the business recognizes the existence of a
condition that it will serve the interest of the society in certain specified ways.
• This theory is drawn from the model of political-social theories
propounded by Thomas Hobbes, John Locke, and Jean Jacques Rousseau.
• The theory is based on an assumed contract between businesses and
members of the society who grant them the right to exist in return for certain
specified benefits that would accrue to them. These benefits are a result of
the functioning of these businesses, both for their own sake and for that of the
larger society.
• When members of the society give the firms legal recognition, the right to
exist, engage them in any economic activity and earn profit by using the
society’s resources such as land, raw materials, and skilled labour, it
obviously implies that the firms owe an obligation to the society. This would
imply that business organizations are expected to create wealth by producing
goods and services, generate incomes by providing employment
opportunities, and enhance social welfare.
Social Contract Theory

• As consumers members of the society benefit from the

establishment of the business firms in three ways:
• Business firms provide increased economic efficiency,
by enhancing the advantages of specialization,
improving decision making resources and increasing
the capacity to acquire and utilize expensive
technology and resources;
• They offer stable levels of production and channels of
distribution;
• They provide increased liability resources, which could
be used to compensate consumers adversely affected
by their products and services.
Social Contract Theory

• Business Firms are likely to produce the social welfare element of

social contract and enjoin the business firm should act in such a
manner so as to
• Benefit consumers to enable them reach maximisation of their
wants;
• Benefit employees to enable them secure high incomes and other
benefits that accrue by means of employment;
• Ensure that pollution is avoided, natural resources are not fast
depleted and workers’ interest are protected.
Social Contract Theory – Criticisms

• Critics argue that social contract is no contract at all.

Legally speaking a contract is an agreement between two
or more persons which is legally enforceable provided
certain conditions are observed.
• A contract implied meeting of minds, which does not exist
in so called social contract. It is neither an explicit nor an
implicit contract.
 Ethics and Religion

The world’s great religions—Christianity, Hinduism and Islam—have

all left their indelible marks on morality and the conduct of people in
every aspect of human endeavor, including business. Every religion
has provided its followers its own set of catechisms, moral
instructions, beliefs, values and virtues, traditions and commitments.
 Teachings of the Church
The Church always supports and promotes the welfare of the poor. People often think
how we can relate business and ethical teachings of the Church. But now the trend has
changed and organizations and institutions relate business to religion and ethics. This
transition is due to the increased importance of ethics in business. The Church’s
concerns and ethical teachings are found in several papal encyclicals, i.e., letters the
pope writes to his followers.
Rerum Novarum
Since the late 19th century, there has developed a strong tradition of reflective thought
on economic issues within the Catholic Church. This concern on economic issues
effectively started in May 1891, with the publication of Rerum Novarum, an encyclical
by Pope Leo XIII. The central theme of the letter was the relationship among the State,
employers and workers.
Features of encyclical
• Directs the State and organizations to perform their duties to the working class to
avoid corruption or unethical behaviour in the society.
• When man is deprived of dignity and equality they will indulge in unethical
practices. Mutual support in the society and organization will help individuals to
perform their best for productivity and profit
 Indian Ethical Traditions
• The Hindu scriptures such as the Gita and the Upanishads speak of the
performance of right duty, at the right time in the right manner. The rich Indian tradition
has always emphasized the dignity of human life and the right to live in a respectful
manner.
• The Bhagawad Gita cites numerous instances of how moral values and ethics can
be incorporated into one's work life. Many of its verses are directly significant for the
modern manager who may be confused about his direction and struggling to find an
answer to ethical dilemmas. The Lord reiterates that work or karma is the driving force
of life, and that this work has to be ethical.
• Chapter II, Verse 47“You have a right to perform your prescribed duty, but you are
not entitled to the fruits of action. Never consider yourself the cause of the results of
your activities and never be attached to not doing your duty.”

This stanza implies that the performer of an action has only to perform the prescribed
duty and not think about the result of the action, because the result is beyond his
control. This teaching of Gita draws one's attention to Nishkama Karma.
 Message of the Gita: Chapter II, Verse 56
“One who is not disturbed in mind amidst the three-fold misery or
elated when there is happiness and who is free from attachment, fears
and anger, is called a sage of steady mind.”

A steady mind gives the right attitude and right direction. Detachment
is that quality which enables the individual not to accept anything for
his personal gratification. Personal desires and conflicting interests
end up in unethical practices.
Gita’s Message in an Organization
When applied to an organization where one is only worried of the
result, he is likely to fall into improper activities. On the other hand, if
he is ready to do his duty to the utmost of his ability and set aside the
result, he will be an ethical person in the organization.
 Business and Islam
All principles covering business emanate from the Holy Quran, as they are
explained and amplified in the Hadith (collection of the Prophet’s sayings).

The Prophet Mohammed ordained that businesses should promote ethical

and moral behaviour and should follow honesty, truthfulness and fulfilment of
trusts and commitments, while eliminating fraud, cheating, cut-throat
competition, lending money at interest to people in need and false advertising.
Shariah and Interest on Capital
Shariah, the canonical law of the followers of Islam, forbids payment and
receipt of interest on capital and money lent and condemns usurious
practices.
Shariah requires that investors profit only from transactions based on the
exchange of assets, not money alone, and therefore, interest is banned.
Major principles of Islam and Ethics
• No fraud and deceit
• No excessive oaths in sale
• Need for mutual consent
• Be strict in regard to weights and measures
• Monopoly is a sin
• Free enterprise- price should not be fixed unless there is a crisis
• Hoarding is forbidden
• Forbidden transactions like intoxicants

• Islamic Bonds or Sukuk

Bankers sell Islamic bonds or sukuk, by using property and other
assets to generate income equivalent to interest they would
pay on conventional debt.
The money cannot be invested on stocks of companies dealing
in alcohol, conventional financial services (banking and
insurance), entertainment (cinemas and hotels), tobacco, pork
meat, defence and weapons while computer software, drugs
and pharmaceuticals, and automobile ancillaries are all
Shariah-compliant.