Business Ethics

(by S. Lioukas)

Business Ethics – principles and standards that

determine acceptable conduct in business

Exec who allegedly made $270M off Enron to pay SEC $

31.5M
The Role of Ethics in Business

Unethical and/or Illegal

• Accounting fraud
• Deceptive advertising
• Unfair competitive practices
• Internet theft
Types and Incidences of Observed
Misconduct

Many business issues may seem straightforward and easy to resolve

on the surface, but are in reality very complex.

2-3
 Individual: types of “bullying” behavior

Abusive and intimidating behavior

“Bullies” behavior:

2-4
Sources of Unethical Behavior in
Organizations

Conflict of interest –
– Advance personal interests over others’
interests
– Benefit self at the expense of the
company
Bad “apples’ or bad “barrel”?

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Least Corrupt Countries

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 C7-S4

Sources of the Business Ethos

BUSINESS
RELIGION LAW
ETHICS

CULTURE PHILOSOPHY
 Three Approaches to Ethics
 Conventional Approach
 Principles Approach
 Ethical Tests Approach
The Conventional Approach

Behavior or act compared with Prevailing

that has been norms of
committed acceptability

Value
judgments and
perceptions of
the observer
 Three Major Principles

 The Utilitarian Ethic

 The Rights Ethic
 The Theory of Justice
 Utilitarianism
 Act so as to produce the greatest ratio of
good/evil
 Look at the costs and benefits of
alternatives, sum them, and chose the
option with the greatest benefit
 Utilitarianism:
Strengths & Weaknesses
 What are the Strengths of Utilitarianism?
– Clear, simple guideline

 What are the Weaknesses of

Utilitarianism?
– Could justify suppression of human rights
 Kant’s Categorical Imperatives
 Provides Foundation for Duties,
Moral Rights
 Universality – Would I want everyone
to behave according to that rule?
 Reversibility – Would I want that rule to
apply to me?
 Treat individuals as autonomous ends,
and so never solely as means.
Respecting their autonomy to chose
 Perspectives on Justice
 The Basic Notion in Justice Theory is
Fairness
 Perspectives on the Meaning of Fairness
– Egalitarianism - equality
– Socialism - need
– Capitalism - effort, merit, contribution
– Libertarianism - free choice, contracts
 Which Perspective is Dominant in Society?
Three(+1) Spheres of Justice
1. DISTRIBUTIVE JUSTICE
Refers to distribution of benefits and burdens
Discrimination only for fair, relevant reasons
Rewards proportionate to efforts and achievements
2. RETRIBUTIVE JUSTICE
Applies to punishment of wrongdoing
Blame fairly imposed
Punishment proportional to crime
3. COMPENSATORY JUSTICE
Covers compensation for injury
Compensation should be adequate
4. PROCEDURAL JUSTICE
rules of representation, legislative, regulatory rule making
Grievance, hiring, firing, performance review, etc. procedures
 A principle centered approach to ethical
problems
Step 1
Ask

Justice
Rights
Utility Are benefits
Are human
Do benefits and costs
rights
exceed costs? fairly
respected?
distributed?

Yes No Yes No Yes No

 Step 2

Compare results

If yes is the answer to all If no is the answer to all

three questions, it is three questions, it is
probably ethical probably unethical

If the answers are

mixed, it could be either
ethical or unethical
 Step 3

Assign priorities to

Utility Rights Justice

 Ethical Tests Approach
 Focus - A simple, practical heuristic (rule of
thumb) that can guide decision making
 Examples
– Test of common sense (The Intuition Ethic)
– Test of one’s best self
– NY Times Test (making something public)
 (The Disclosure Rule)
– Test of ventilation (reaction by others)
– Test of the purified idea (OK’d by authority)
– Gag Test
 International aspect of ethics
 “Man is the measure of all things” Protagoras
(490-420 BC)

 Man = Each individual man (human), Plato’s

interpretation
 Man = Society, different societies different ethics
 Man = Humanity
 Plato’s approach: Ethics are independent of
humanity
 Donaldson (1996)
 Respect for core human values, which
determine the absolute moral threshold for
all business activities.
 Respect for local traditions.
 Context matters when deciding what is right
and what is wrong.
 The Dilemma of the
Multinational Corporation
Home Country The Host Country
Stakeholder Multinational Stakeholder
Pressures Corp. Pressures
Ethical Choices in Home vs. Host
Country Situations
International Law
Global Codes of Conduct

ETHICAL CULTURAL
IMPERIALISM RELATIVSM
Broad
Home Country Middle Ground Host Country

• Ethical/moral Mix of Home and Host • Ethical/moral

standards of Country Standards standards of
home country host country

Application of Ethical Principles

(see notes)
 Corporate Corruption
Why do managers act in unethical ways?

Or

What are the sources of corporate

corruption?
 The Arthur Andersen Story:
Founding
 In 1913, in Chicago, a new accounting firm was founded by two
young CPAs.

 On December 1, 1913, Arthur E. Andersen (a 28 year old of

Norwegian descent) and Clarence M. DeLany founded the
company Andersen, DeLany & Co.

 In an environment where accounting was not synonymous to

honesty, the firm stood out for its integrity.

 Arthur Andersen’s motto was "Think straight, talk straight."

 The AA story: the railway
company incident
 Andersen notices that the railway company was not properly accounting for
its maintenance charges, which should have been part of its operating
expenses.
 He informed the company, but received no response.
 Then he informed the company’s president that he would mention this in his
report if the errors were not corrected.
 Furious, the president of the railway company came to Andersen’s office to
confront him.
 “There’s not enough money in the city of Chicago to induce me to change that
report!”
 Andersen lost the business.
 One month later the railway company went bankrupt.
 The AA story: Andersen’s and
Spacek’s legacy
 Andersen (1913 – 1947), Spacek (1947 – 1973)
 Honesty and Professionalism
 Reputation for sticking to principle at the expense of losing customers
 The AA way was focused on training so that all AA auditors would take the
same approach in dealing with a particular problem
 AA established a training centre in St. Charles, Illinois and spent millions
over the years to train its people.
 In 2000, the St. Charles centre had a permanent staff of 500.
 AA always led the industry in developing new standards and procedures
 AA was not afraid to take on all the other auditing firms and some industries
(Railways, Savings & Loans).
Are we talking about the same
company here?
 The More Recent AA story
 Poor Ethical leadership after Spacek
 Enter consulting – different business with MUCH
higher fees
 Charging $ 150,000 for a cd
 Culture deterioration – the biggest sin became to
loose a customer!
 AA had quite a few similar problems before Enron
“…Usually, unethical or illegal behaviour
happens when descent people are put
under unbearable pressure to do their jobs
and meet ambitious goals without the
resources to get the job done right”
(B. Toffler, 2003)
 Enron put itself in a similar situation

“This was Enron’s dirty little secret: a company built around trading
and deal making cannot possibly count on steadily increasing
earnings . . . As one former Enron managing director says, ‘A
business that had stable and predictable earnings that’s primarily
engaged in the trading of commodities is a contradiction in
terms.” (McLean and Elkind, 2003: 126)
 Motive and Opportunity
 Very difficult to achieve desired results
without ‘cheating’
 Inadequate Control Mechanisms

 But this is not the whole story…

 Trust Violators and their
Rationalizations
 One trust violator from the ones described by Cressey (1953)
‘borrowed’ thousands of dollars from the bank he was working
for.

 But was keeping track of exactly how much he had ‘borrowed’

on the back of the envelope where he kept the title papers of an
apartment he owned which he was planning to sell in order to
return the money to the bank.

 So when he was caught, in his mind it was not fraud, just bad
timing.
 Types of Rationalizations

1. “| was just following orders”

2. “Nobody got hurt”
3. “They deserved it”
4. “After what they did, this is nothing”
5. “I did it for the good of the company”
 Types of Rationalizations
Sykes and Matza (1957)
1. Denial of responsibility: The
delinquent defines ‘himself as lacking
responsibility for his deviant actions.’
(1957: 667)
2. Denial of injury: The delinquent can
argue that he/she did not really hurt
anybody.
3. Denial of the victim: The delinquent
argues that the victims were not really
victims but deserved what they got.
4. Condemnation of the condemners:
The delinquent argues that his
condemners are blaming him for
inappropriate reasons, they are
hypocrites.
5. Appeal to higher loyalties: The
delinquent argues that he had to break
some rules for the greater good.
Ashforth and Anand (2003)
1. Legality: Actors may argue that acts are
not actually illegal
2. Denial of responsibility …
3. Denial of injury …
4. Denial of the victim …
5. Social Weighing: a broader version of the
‘condemnation of the condemners,’ the
main idea is “we are not so bad.”
6. Appeal to higher loyalties …
7. Metaphor of the Ledger: here past good
works are see as having earned credit
that counterbalances current minor
offences.
8. Refocusing Attention: coping through the
shifting of attention away from the so-
called ‘dirty work.’
 Facilitating Factors
1. Ethical Distance (too far to know who is hurt)
2. Organizational Complexity (can facilitate
rationalizations and increase ethical distance)
3. Shifting Baseline (loss of perception of change
with time)
4. Social Pressure (pressures from friends,
colleagues, bosses…)
5. Escalating Commitment
 Shifting Base Line
Level of
morality

What the actor can see

Acceptable
Change

Acceptable
Change

time
 Escalation of Commitment
“There are many instances in which individuals can become locked into a
costly course of action. Because it is often possible for persons who
have suffered a setback to recoup their losses through an even greater
commitment of resources to the same course of action, a cycle of
escalating commitment can be produced.” (Staw, 1981: 577)

 Vietnam
 Enron
 1st World War
 …
 MORE
 Motive
 Opportunity
 Rationalization
↓
 Escalation of Corruption
Escalation of Corruption
Regulations

Laws and regulations encourage

businesses to conform to society’s
standards, values, and attitudes.
Sarbanes-Oxley Act - 2002

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Improving Ethical Behavior in Business

Codes of Ethics –
Formalized rules and standards that describe
what a company expects of its employees.

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Codes of Ethics

National Business Ethics Survey (NBES)

According to the NBES, employees in

organizations with written standards of
conduct are more likely to report misconduct
when they observe it.

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Codes of Ethics

Whistleblowing

The act of an employee exposing an

employer’s wrongdoing to outsiders, such as
the media or government regulatory
agencies.

2-45
 Application to your company
Given our previous discussion about MORE, can you
apply what we discussed above to your own work
situations. More specifically, please

(1) Identify the Motives and Opportunities that might

lead one to unethical behaviour.
(2) Identify the possible Rationalizations that he/she
might use.
(3) Come up with any measures that you think might
prevent the above from occurring and leading to
escalation of unethical/corrupt behaviour.