Chapter 2

Defining
Business Ethics

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 Learning Outcomes
• Define the term business ethics.
• Identify an organization’s stakeholders.
• Discuss the position that business ethics is an oxymoron.
• Summarize the history of business ethics.
• Identify and propose a resolution for an ethical dilemma in
your work environment.
• Explain how executives and employees seek to justify
unethical behavior.

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 Business Ethics
Application of ethical standards to business behavior.

Can be approached from two perspectives.

• Descriptive: Documentation of what is happening.
• Normative (prescriptive): Recommendation of what should happen.

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 Stakeholders
Stakeholder: Someone with a share or interest in a business
enterprise.
• Not every stakeholder will be relevant in every business situation.

Concerns in terms of ethical operations.

• Involvement of the stakeholders with the actions of the organization.
• Extent to which they would be impacted by unethical behavior.

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 Figure 2.1: Stakeholder Interests 1

Stakeholders Interest in the Organization

Stockholders or shareholders • Growth in the value of company stock.
• Dividend income.
Employees • Stable employment at a fair rate of pay.
• A safe and comfortable working environment.
Customers • “Fair exchange”—a product or service of
acceptable value and quality for the money spent.
• Safe and reliable products.
Suppliers/vendor partners • Prompt payment for delivered goods.
• Regular orders with an acceptable profit margin.
Retailers/wholesalers • Accurate deliveries of quality products on time
and at a reasonable cost.
• Safe and reliable products.

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 Figure 2.1: Stakeholder Interests 2

Stakeholders Interest in the Organization

Federal government • Tax revenue.
• Operation in compliance with all relevant
legislation.
Creditors • Principal and interest payments.
• Repayment of debt according to the agreed
schedule.
Community • Employment of local residents.
• Economic growth.
• Protection of the local environment.

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 Figure 2.2: Stakeholder Impact from Unethical Behavior 1

Stakeholders Interest in the Organization

Stockholders or shareholders • False and misleading financial information on
which to base investment decisions.
• Loss of stock value.
• Cancellation of dividends.
Employees • Loss of employment.
• Not enough money to pay severance packages or
meet pension obligations.
Customers • Poor service quality (as WorldCom struggled to
combine the different operating and billing
systems of each company it acquired, for
example).
Suppliers/vendor partners • Delayed payment for delivered goods and
services.
• Unpaid invoices when the company declared
bankruptcy.

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 Figure 2.2: Stakeholder Impact from Unethical
Behavior 2

Stakeholders Interest in the Organization

Federal government • Loss of tax revenue.
• Failure to comply with all relevant legislation.
Creditors • Loss of principal and interest payments.
• Failure to repay debt according to the agreed
schedule.
Community • Unemployment of local residents.
• Economic decline.

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 Is Business Ethics an Oxymoron?
Unfair to brand every organization as fundamentally unethical in
its business dealings.

Numerous prominent organizations that were previously held as

models of aggressive business management have later been
proved to be fundamentally flawed in their ethical practices.
• Positive outcome: Increased attention to the need for third-party
guarantees of ethical conduct and active commitments from the rest of
the business world.

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 Factors Ensuring Ethical Conduct
• Corporate governance: System by which business
corporations are directed and controlled.
• Code of ethics: Company’s written standards of ethical
behavior that are designed to guide managers and employees
in making the decisions and choices they face every day.

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 Dual Function of Code of Ethics
Serves as:

• A message to the organization's stakeholders.

• Represents a commitment to the highest standards of ethical behavior.
• An internal document.
• Represents a guide managers and employees in making the decisions and
choices.

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Figure 2.3: A Brief History of Business Ethics 1

Decade Ethical Climate Major Ethical Business Ethics

Dilemmas Developments
1960s Growing concern over the • Pollution. • Consumers Bill
power and influence of the • Profits over of Rights.
military-industrial complex people. • Corporate codes
leads to social unrest and anti- • Civil rights. of conduct.
war protests. Increased • Product safety • Expectations of
consumer activism and the • Job security. equality, social
development of a more justice, and
adversarial relationship economic
between employees and stability.
management.

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Figure 2.3: A Brief History of Business Ethics 2

Decade Ethical Climate Major Ethical Business Ethics

Dilemmas Developments
1970s Major scandals draw attention • Pollution. • 1977 Foreign
to unethical conduct. Nixon's • Labor issues: Corrupt
Watergate leads to questions workplace Practices Act
about ethics in government. safety, wage (FCPA).
Greater corporate awareness equality, forced • Business ethics
of public image. Recession labor. gains credence
exacerbates unemployment • Covering up as a distinct area
and labor issues. unethical of academic
conduct to study.
protect • 1977 Ethics
corporate image. Resource Center
(ERC) founded.

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Figure 2.3: A Brief History of Business Ethics 3

Decade Ethical Climate Major Ethical Business Ethics

Dilemmas Developments
1980s Aggressive downsizing by • Savings and Loan • 1986 Defense
corporations redefines the scandal. Industry
social contract between • Bribery and Initiative on
employers and employees. corruption in Business Ethics
Loyalty erodes in the face of a international and Conduct (D I
clear message of expendability. contracts. I).
Stakeholder model introduced • Waste and fraud • 1986 False
as a construct for business in government Claims Act
ethics decisions. contracting and amended to
defense control waste,
spending. fraud and abuse
in federal
spending.

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Figure 2.3: A Brief History of Business Ethics 4

Decade Ethical Climate Major Ethical Business Ethics

Dilemmas Developments
1990s Expansion of the • Financial fraud. • 1991 Federal Sentencing
Internet facilitates • Avoidance of Guidelines for
global commerce regulations by Organizations (FSGO).
and presents new opening • Class-action lawsuits.
ethical challenges. manufacturing plants • Legal precedent for
Corporate liability in developing Board of Directors’
cases increase. countries. responsibility for
• Corporate liability for business ethics.
personal damage • Ethical performance
(Dow Chemical, Big documented in annual
Tobacco). report (Royal Dutch/
Shell International).

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Figure 2.3: A Brief History of Business Ethics 5

Decade Ethical Climate Major Ethical Business Ethics

Dilemmas Developments
2000s Increased concerns • Cyber crime. • 2002 Sarbanes-Oxley
that business ethics • Falsifying financial Act (SarBox).
was being taught in reports. • Anti-corruption
business schools but • Privacy issues (data efforts grow.
not practiced in the mining and identity • Emphasis on
marketplace. A series protection). corporate social
of financial scandals • International responsibility (CSR).
(Enron, WorldCom, corruption. • 2010 Dodd-Frank
HealthSouth) • Loss of privacy— Wall Street Reform
prompted calls for employees versus and Consumer
increased regulations employers. protection Act.
and harsher
penalties.

Source: Adapted from Ethics Resource Center, “Business Ethics Timeline,.” 2002.

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 Resolving Ethical Dilemmas
Ethical dilemma: Situation in which there is no obvious right or
wrong decision, but rather a right or right answer.
• Can be resolved by recognizing the type of conflict.
• Truth versus loyalty.
• Short term versus long term.
• Justice versus mercy.
• Individual versus community.

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 Resolution Principles for Ethical Dilemmas
Ends-based.
• Which decision would provide the greatest good for the greatest number
of people?

Rules-based.
• What would happen if everyone made the same decision as you?

The Golden Rule.

• Do unto others as you would have them do unto you.

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 Justifying Unethical Behavior

Belief that the activity is within reasonable ethical and legal limits.

Belief that the activity is in the individual’s or the corporation’s best

interest.

Belief that the activity is safe because it will never be found out or
publicized.

Belief that because the activity helps the company, it will be condoned,
and the perpetrator will be protected.

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