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Chapter 1
The Importance of Business Ethics
O.C. Ferrell, John Fraedrich, and Linda Ferrell, Business Ethics: Ethical Decision Making and Cases, 13th Edition. ©2022 Cengage.
All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Learning Objectives
By the end of this chapter, you should be able to:
• Explore conceptualizations of business ethics from an organizational
perspective
• Examine the historical foundations and evolution of business ethics
• Provide evidence that ethical value systems support business performance
• Describe the extent of ethical misconduct in the workplace and the pressures
for unethical behavior
Icebreaker
• What does the term “ethics” mean to you?
• Why do you think ethics is important in business?
• Can you think of an example of a time a business engaged in unethical
behavior?
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Business Ethics Defined
Business Ethics Defined 1 of 2
• Morals – 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
• Principles – Specific and pervasive boundaries for behavior that should not
be violated
– These often become the basis for rules (human rights, freedom of speech).
• Values – Enduring beliefs and ideals that are socially enforced
Business Ethics Defined 2 of 2
• Ethics – Behavior or decisions made within a group’s values or morals
– Right or wrong behavior is defined by the group.
– Within corporate culture there are rules and regulations that determine right/wrong.
Knowledge Check
Question: What are trust and integrity examples of?
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Why Study Business Ethics?
Why Study Business Ethics? 1 of 4
A Crisis in Business Ethics
• Business ethics has become a major concern.
• Workplace integrity – The pressure to compromise organizational
standards, observed misconduct, reporting of misconduct when observed,
and retaliation against reports
• Misuse of company resources, abusive behavior, harassment, accounting fraud, conflicts of interest, defective
products, bribery, product knock-offs, and employee theft are all problems cited as potential risk areas
• constitutes antitrust, deceptive advertising, and violations of the Foreign Corrupt Practices Act that defines
bribery in global business.
TABLE 1-1 Observed Misconduct
in the U.S. Workforce
Response Percentage
Observed misconduct 49%
Abusive behavior 22%
Lying to employees and external stakeholders 25%
Conflicts of interest 23%
Health violations 22%
Pressure to compromise standards 30%

Report observed misconduct 81%
Experience retaliation for reporting 79%
Specific Issues
• There are a number of ethical issues that must be addressed to prevent
misconduct.
• Ethics plays an important role in the public sector as well.
• Every organization has the potential for unethical behavior.
• Most decisions are judged as right or wrong, ethical or unethical.
– Legislation usually follows.
The Reasons for Studying Business Ethics
• Business ethics is more than an extension of an individual’s personal values.
• Professionals must deal with individuals’ personal moral dilemmas.
– Moral dilemma – Two or more morals in conflict with one another
– Value dilemma – Two or more beliefs/ideals in conflict with one another
• Being a good person may not be sufficient to handle ethical issues in

business.
• Professionals in any field, including business, must deal with individuals’ personal moral dilemmas because
such dilemmas affect everyone’s ability to function on the job. A moral dilemma is defined as a situation where
the person is faced with multiple choices, all of which are undesirable as defined by the person. A value
dilemma is the same, only that the individual’s beliefs are grounded in societal norms. Normally, a business
does not dictate a person’s morals. Such policies would be illegal. Only when a person’s morals influence his or
her performance on the job does it involve a dimension within business ethics.
• Studying business ethics will help you:
– Identify ethical issues when they arise
– Recognize approaches for resolving ethical issues
– Cope with conflicts between your own personal values and those of the organization
in which you work
– Gain knowledge to make more ethical business decisions
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The Development of Business Ethics
The Development of Business Ethics 1 of 9
Before 1960: Ethics in Business
• Capitalism dictated business practices.
– 1920s: Provide a living wage—income sufficient for education, recreation, health, and
retirement
– 1930s: The New Deal (President Franklin D. Roosevelt)—blamed business as the cause
for U.S. problems
– 1950s: The Fair Deal (President Harry S. Truman)—defined such matters as
environmental responsibility as ethical issues that businesses had
to address
The 1960s: The Rise of Social Issues in Business
• Antibusiness trend; decay of inner cities; growth of ecological problems
• President John F. Kennedy: Consumers’ Bill of Rights
– Right to safety
– Right to be informed
– Right to choose
– Right to be heard
• President Lyndon B. Johnson: The “Great Society”
– Extended national capitalism with the U.S. government’s responsibility to provide all
citizens with some degree of economic stability, equality, and social justice
The 1970s: Business Ethics as an Emerging Field
• Business ethics became a common expression.
• Corporate social responsibility – An organization’s obligation to maximize
its positive impact on stakeholders and minimize its negative impact
• Academic researchers sought to identify ethical issues and describe how
businesspeople might choose to act in particular situations.
• Limited efforts were made to describe how the ethical decision-making
process in business worked and to identify the many variables that
influenced the process.
The 1980s: Business Ethics Reaches Maturity
• Centers for business ethics provided publications, courses, conferences, and
seminars.
• Stakeholder theory was developed.
• Defense Industry Initiative on Business Ethics and Conduct – An
organization developed to guide corporate support for ethical conduct
– Codes of conduct must be understandable and cover substantive areas in detail.
– Members are expected to provide ethics training and continuous support for employees.
– Defense contractors must create an open atmosphere in which employees feel
comfortable reporting violations without fear of retribution.
– Companies must perform extensive internal audits and develop effective internal
reporting and voluntary disclosure plans.
– Members must preserve the integrity of the defense industry.
– Members must adopt a philosophy of public accountability.
• Reagan–Bush Era: Belief that self-regulation rather than regulation by
government was in the public’s interest
The 1990s: Institutionalization of Business Ethics
• President Bill Clinton: Continued to support self-regulation and free trade
• Government action with health-related social issues such as teenage
smoking
• Federal Sentencing Guidelines for Organizations (FSGO) – Guidelines
that codified into law incentives to reward organizations for taking action to
prevent misconduct, such as developing effective internal legal and ethical
compliance programs
The 2000s: Twenty-First Century Business Ethics
• President George W. Bush: Misconduct at Enron, WorldCom, Halliburton,
and Arthur Andersen caused the government and the public to look for new
ways to encourage ethical behavior.
• Sarbanes–Oxley Act – The most far-reaching change in organizational
control and accounting regulations since the Securities and Exchange Act of
1934, which made securities fraud a criminal offense and stiffened penalties
for corporate fraud
• The Sarbanes–Oxley Act and the FSGO institutionalized the need to
discover and address ethical and legal risk.
• President Barack Obama: Inherited the great global financial recession
The 2010s: New Challenges in Business Ethics
• Dodd–Frank Wall Street Reform and Consumer Protection Act –
Legislation that addressed some of the issues related to the financial crisis
and recession and designed to make the financial services industry more
ethical and responsible
• Enforcement of the FCPA, created in the 70s, became a top priority for the
SEC; outside of the U.S., the United Kingdom instituted the Bribery Act.
• Distrust of corporate America coincided with influx of Millennials into workforce
• Tension between increasing transparency and protecting privacy emerged
• President Donald Trump: Decreased environmental and financial regulations;
questioned sustainability
Discussion Activity 1
Millennials and Generation Z highly value authenticity and transparency from

businesses and have become influential consumer groups, seeking products
that align with their values. These generations let business ethics and CSR
issues guide not only product purchase decisions but also employer choices.
Do you seek products that align with your values?
Discussion Activity 1 Debrief
• Did everyone in your group say that they seek products that align
with their values?
• Why do you think this varies by generation?
• Will you seek (or have you sought) an employer that aligns with your values?
The 2020s and Beyond
• Environmental social governance (ESG) – A framework for evaluation of
firm performance in the areas of environmental, social, and governance
• Sustainability issues are causing firms and government to find solutions.
• There is increasing demand for responsible ethical conduct to be a part of
organizational culture.
• Future ethical issues will relate to artificial intelligence (AI) and big data.
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Developing Organizational
and Global Ethical Cultures
Developing Organizational and
Global Ethical Cultures 1 of 2
• Ethics and compliance are designed to establish appropriate conduct and
core values.
• Ethical culture – Acceptable behavior as defined by the company and
industry =The goal of an ethical culture is to
minimize the need for enforced compliance
– Reflects the integrity of decisions made of rules and maximize the use of principles
– Is a function of many factors, including: that contribute to ethical reasoning in
difficult or new situations.
o Corporate policies
=Ethical culture is positively related to
o Top management’s leadership on ethical issues
workplace confrontation over ethics issues,
o The influence of coworkers reports to management of observed
misconduct, and the presence of ethics
o The opportunity for unethical behavior hotlines.
Developing Organizational and
Global Ethical Cultures 2 of 2
• Globally, businesses are working closely together to establish standards
of acceptable behavior.
– ISO 19600 is a global compliance management standard that addresses risks, legal
requirements, and stakeholder needs.
• Many companies demonstrate their commitment toward acceptable

conduct by adopting globally recognized principles.
• Global compact – Set of 10 principles concerning human rights, labor,
the environment, and anti-corruption; the purpose is to create openness
and alignment among business, government, society, labor, and the
United Nations
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The Benefits of
Business Ethics
Debate Issue: Take a Stand
• While research suggests ethical businesses have better performance, there
is also an alternate view. Many businesspeople think ethics and social
responsibility require resources that do not contribute to profits, and time
spent in ethics training could be better used for other business activities.
• Take a stand:
1. Ethical businesses are the most profitable.
2. The most ethical businesses are not the most profitable.
Debate Issue: Debrief
• Those who argue that ethical businesses are more profitable could point to
the different studies showing a positive correlation between ethics and
profitability, the goodwill gained from ethical conduct, and the additional
customer confidence associated with an ethical company. The opposition
might point out that some dishonest companies have gotten away with only
small penalties for misconduct and that companies must be more concerned
with obtaining profits than spending time worrying about ethics.
FIGURE 1-2 The Role of Organizational
Ethics in Performance
The Benefit of Business Ethics 1 of 4
Ethics Contributes to Employee Commitment
• There is a willingness to sacrifice for the organization.
• It increases group creativity and job satisfaction and decreases turnover.
• There is less pressure to compromise ethical standards.
• It leads to a greater absence of misconduct.
• Strong community involvement increases loyalty and positive self identity.
Ethics Contributes to Investor Loyalty
• Ethics provides a foundation for efficiency, productivity, and profits.
• Negative publicity, lawsuits, and fines can lower stock prices, diminish
customer loyalty, and threaten a company’s long-term viability.
• The demand for socially responsible investing is increasing.
Ethics Contributes to Customer Satisfaction

• High levels of perceived corporate misconduct decrease customer trust.
• Companies viewed as socially responsible increase customer trust and
satisfaction.
• Consumer respondents stated they would pay more for products from
companies that give back to society in a socially responsible and
sustainable manner.
Ethics Contributes to Profits

• Being ethical leads to better business performance.
• Corporate concern for ethical conduct is becoming a part of strategic
planning toward obtaining the outcome of higher profitability.
• Business ethics is becoming more than just a function of compliance; it’s
becoming an integral part of management’s efforts to achieve competitive
advantage.
Discussion Activity 2
What are the pros and cons of business ethics?
Discussion Activity 2 Debrief
Are the pros and cons you thought of listed below?
Pros Cons
• Ethics contributes to employee • Ethics eats into revenues, sales,
commitment. profitability.
• Ethics contributes to customer satisfaction. • Ethics does not maximize shareholder
• Ethics contributes to profits. benefits.
• Ethics provides a foundation for efficiency, • Ethics decreases competitive edge.

productivity, and profits.
• Negative publicity results in lawsuits, fines,
lower stock prices, diminished customer
loyalty.
• The demand for socially responsible
investing is increasing.

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Chapter 1

The Importance of Business Ethics

• Values – Enduring beliefs and ideals that are socially enforced

Pressure to compromise standards 30%

• Being a good person may not be sufficient to handle ethical issues in

Millennials and Generation Z highly value authenticity and transparency from

Do you seek products that align with your values?

• Many companies demonstrate their commitment toward acceptable

Ethics Contributes to Customer Satisfaction

Ethics Contributes to Profits

What are the pros and cons of business ethics?

• Ethics provides a foundation for efficiency, • Ethics decreases competitive edge.

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