Chapter

5
Ethical Issues in Business
 The Meaning of Ethics
 Business Ethics across Organizational Functions
 Why Ethical Problems Occur in Business
 Ethics in a Global Economy
 Ethics, Law, and Illegal Corporate Behavior
 The meaning of ethics

Ethics
A conception of right and wrong conduct. It
tells us whether our behavior is moral or
immoral with fundamental human
relationships.
Ethical Principles
Guides to moral behavior.
Ethical Relativism
Ethical principles defined in context.
 More Definitions

Business Ethics
The application of general ethical ideas to
business behavior.
Not a special set of principles different from
ethics in general.
Businesses are judged no differently than
individuals.
 Figure 5.1

Observations of unethical behavior at work

Percentage of type of observed misconduct:

Unsafe working conditions 56%
Deceptive sales practices 56%
Mishandling proprietary or confidential information 50%
Violations of privacy rights 38%
Shipping low-quality or unsafe products 37%
Employment discrimination 36%
Sexual harassment 34%
Altering product quality or safety test results 32%
Antitrust violations or unfair competitive practices 32%
Environmental breaches 31%
Source: 2000 Organizational Integrity Survey: A Summary, Integrity Management Services, KPMG LLP
 Why should business be ethical?

1. To meet demands of business stakeholders.

• Consumers may conduct more business
with the firm and stockholders will benefit.
2. To enhance business performance.
• “ethics pays”
• Studies show that firms with ethics policies
show stronger economic measures
3. To comply with legal requirements.
• Two laws with impact:
 U.S. Corporate Sentencing Guidelines:
Directives
Establish standards and procedures to reduce criminal
conduct.
Assign high-level officer(s) responsibility for compliance.
Not assign discretionary authority to “risky” individuals.
Effectively communicate standards and procedures through
training.
Take reasonable steps to ensure compliance—monitor and
audit systems, maintain and publicize reporting systems.
Enforce standards and procedures through disciplinary
mechanisms.
Following detection of offense, respond appropriately and
prevent reoccurrence.
 Sarbanes-Oxley Act of 2002

 The firm’s audit committee is entrusted with auditor

oversight with all independent directors on the
committee.
 Certain nonaudit services by auditors to clients are
banned, nonaudit services must be preapproved by the
audit committee, the lead auditor must be rotated every
five years, and auditors report to the audit committee.
 The CEO and CFO must sign off on financial statements
as accurate and fair and must repay bonuses if a
restatement of financials is undertaken.
 Sarbanes-Oxley Act of 2002

A Public Company Accounting Oversight Board is

established.
 The firms are not permitted to offer loans to its
executive officers or board of directors.
 SEC rules will create guidelines for internal controls and
financial reporting procedures, require the adoption of
or waiver for a code of ethics for the board, mandate a
financial expert must serve on the board, and compel the
firm to state its financial condition in plain English on a
rapid or current basis.
 ERISA penalties are increased from $5,000 to $100,000
and one year in prison to $100,000 to $500,000 and up
to 10 years in prison.
 Why should business be ethical?

4. To prevent or minimize harm.

• “Do no harm”
• Employee theft
5. To promote personal morality.
• Being asked to perform duties not in line with
personal ethics is stressful
• 79% of employees said that “their
organization’s concern for ethics and doing the
right thing” was an important reason they
continued to work there.
 Functional-Area Ethics
 Accounting Ethics
• Honesty, integrity, and accuracy are absolute
requirements of the accounting function.
• Conflicts of interest – where loyalty or
obligation to the company is divided or tin
conflict with self-interest and the interest of
others.
• Sarbanes-Oxley Act limits the offering of
nonaudit services by the auditing firm.
 Exhibit 5.A, Page 89
Professional codes of conduct
in accounting
American Institute of Certified Public Accountants (AICPA)
• Responsibilities: In carrying out their responsibilities as professionals,
members should exercise sensitive professional and moral judgments
in all their activities..
• The Public Interest: members should act in a way that will honor the
public interest.
• Integrity: members should perform all professional responsibilities with
the highest sense of integrity.
• Objectivity and Independence: a member should maintain objectivity
and be free of conflicts of interest in discharging services.
• Due care: a member should discharge professional responsibility to the
best of the member’s ability.
• Scope and nature of services: members should observe the Principles
of the Code of Professional Conduct in determining the scope and nature
of services to be provided. Source: www.aicpa.org.
 Functional-Area Ethics
 Financial Ethics
• Insider trading, illegal stock transactions, price
fixing.
• In wake of 9/11/01, US Treasury Department
now requires firms to implement comprehensive
money-laundering compliance programs to
identify risks and minimize opportunities for
abuse.
 Exhibit 5.A
Professional codes of conduct in finance

Association for Investment Management and Research (AIMR)

Members of the Association shall:

1) Act with integrity, competence, dignity, and in an ethical manner when

dealing with the public, clients, prospects, employers, employees, and
fellow members.
2) Practice and encourage others to practice in a professional and ethical
manner that will reflect credit on members and their profession.
3) Strive to maintain and improve their competence and the competence of
others in the profession.
4) Use reasonable care and exercise independent professional judgment.

Source: www.aimr.org/ethics
 Functional-Area Ethics
 Marketing Ethics
• Relations with customers tend to generate
many ethical problems – pricing, promotions,
advertising, product information, relations
between advertising agencies and their
clients, and marketing research.
• Areas of concern include: misleading product
info., false and misleading advertising claims,
high pressure sales tactics, bribery and
kickbacks, and unfair and predatory pricing.
 Exhibit 5.Ba

Professional codes of conduct in marketing

American Marketing Association (AMA)
Members of the AMA have embraced the following topics:

• Marketers must accept responsibility for the consequences of their activities

and make every effort to ensure that their decisions, recommendations, and

actions function to identify, serve, and satisfy all relevant publics.

• Marketers shall uphold and advance the integrity, honor, and dignity of the
marketing profession.
• Participants in a marketing exchange should be able to expect that products
services offered are safe, communications about offered products and
services are not deceptive, all obligations in an exchange are discharged in
good faith, and appropriate internal methods exist for equitable redress of
grievances concerning purchases.
• Marketers should not demand, encourage or apply coercion to Source:
obtain www.awma.org
 Functional-Area Ethics
 Information Technology Ethics
• Invasion of privacy; the collection, storage, and
access of personal and business information;
confidentiality of e-mail; copyright protection
regarding software, music, and intellectual
property.
 Other Functional Areas
 Defective products, toxic production processes,
flawed manufacturing and lack of inspection,
purchasing and supply.
 Exhibit 5.Bb
Professional codes of conduct
in information technology
Association for Computing Machinery (ACM)
General imperatives for ACM members include:

• contributing to society and human well-being,

• avoid harm to others,
• be honest and trustworthy,
• be fair and take action not to discriminate,
• honor property rights,
• honor copyrights and patents,
• give proper credit for intellectual property,
• respect privacy of others, and
• honor confidentiality.

Source: www.acm.org/constitution/code
 Why ethical problems occur in business

Reason Nature of Typical Attitude

Ethical Approach
Problem
Personal gain Selfish interest Egotistical “I want it!”
and selfish versus others’ mentality
interest interests

Competitive Firm’s interest Bottom-line “We have to

pressures on versus others’ mentality beat the others
profits interests at all costs!”
 Why ethical problems occur in business

Reason Nature of Typical Attitude

Ethical Approach
Problem
Business goals Boss’s interests Authoritarian “Do as I say, or
versus personal versus mentality else!”
values subordinates’
values

Cross-cultural Company’s Ethnocentric “Foreigners

contradictions interests versus mentality have a funny
diverse cultural notion of
traditions and what’s right
values and wrong.”
 Exhibit 5.C
Anticorruption and bribery efforts in Russia
President Putin’s commitment to end bribery and corruption is
demonstrated by the following actions:
 A probe of high-level bureaucrats led to charges against many officials
including Railways Minister Nikolai Aksyonenko for illegally spending
ministry funds.
 Judges’ salaries were increased fivefold in an effort to cut down on courtroom
bribery.
 A new law banned the intervention of state prosecutors in private litigation
between contending business parties, eliminating another potential bribery
situation.
 Other regulations sharply restricted discounts that railroad regulators could
give to shippers.
 The number of business activities that required a license was drastically
reduced from 2,000 to 100—fewer licenses meant fewer chances for a
bureaucrat to be in line for a bribe. Source: “Cleanup Time: The Kremlin is Launching a Major Attack
on Corruption,” Business Week, January 14, 2002, pp.46-47
 Figure 5.4
International codes of conduct and their focus
Ethical Focus ICC OECD ILO UN/CTC EU UN/GC
Economic X X X X X
development
Technology X X X X X X
transfer
Regulatory action X X X X X
Employment X X X X X
Human rights X X X X
Environmental X X X
protection
Consumer X X
protection
Political action X X
Source: William C. Frederick, “The Moral Authority of Transnational Corporate Codes,” Journal of Business Ethics 10 (1991), pp. 165-
177; and Kathleen A. Getz, “International Codes of Conduct: An Analysis of Ethical Reasoning,” Journal of Business Ethics 9(1990), pp.
567-577.
 Ethics and Law
 Laws and ethics are not quite the same.
 Laws are a society’s attempts to formalize the
general public's ideas of right and wrong
 Ethical concepts are more complex than written
rules of law – go beyond the formal language of
law and the meanings given to legal rules.
 Costs of Corporate Law Breaking
Estimated to cost American consumers between
$174 and $231billion per year!!
In addition are physical and social costs…