15 Business Ethics- Meaning and Importance

1. Learning Outcome

2. Meaning and Definitions

3. Features of Business Ethics

4. Need of Business Ethics

5. Scope of Business Ethics

6. Various Issues of Business Ethics

7. Principles of Business Ethics

8. Importance of Business Ethics

9. Unethical Business Practices

10. Causes for Unethical Behaviour or Unethical Business Practices

11. Measures to Prevent or Control Unethical Business Practices

12. Summary

1. Learning Outcome:

After completing this module, the students will be able to:

Understand the concept of business ethics
Describe the need and scope of business ethics Discuss significance of business ethics
Explain unethical business practices and ways to control them

2. Meaning and Definitions

Ethics can be defined as set of moral principles and values about what is fair or unfair, right or wrong, true or false, proper or improper. What is right is ethical and what is wrong is unethical.

Business ethics means applying the principles of general ethics to business practices. In other words, it is the application of ethical values to business behaviour.

Business ethics or ethical standards are the philosophies, practices, norms and principles that guide owner or management in their day to day business decisions. Business ethics requires the consideration of impact of various business decisions on the interest of various stakeholders and taking measures to safeguard their interest by observing morality in business activities.

According to Wheeler, ‘‘Business ethics is an art and science for maintaining harmonious relationship with society, its various groups and institutions as well as reorganizing moral responsibility for the rightness and wrongness of business conduct.’’

In the words of Cater Mcnamara, ‘‘Business ethics is generally coming to know what is right or wrong in the workplace and doing what is right. This is in regard to effects of products and services and in relationship with the stakeholders. Attention to the ethics in the workplace sensitizes managers and the staff to know that they should act so that they retain a moral compass. Consequently, business ethics can be strong preventive medicine.’’

Business ethics can be best understood in terms of three Cs:

Compliance: Business ethics means following laws, organizational policies and principles of morality like honesty, no jealousy, no cheating etc.
Contribution: Business ethics implies serving the society through core values, quality products, better quality of life, more employment opportunities, optimum utilization of scarce resources and community development activities.
Consequences: Business ethics means considering impact of business decisions and activities on the stakeholders’ interest, environment and public image.

3. Features of Business Ethics

Business ethics are the principles, practices and standards that guide an organisation while conducting various activities and interacting with various external or internal stakeholders.

Business ethics relates to the behaviour of a businessman while conducting business. Business ethics are dynamic in nature.

It has universal application.

It is considered as science as well as an art. Ethical standards develop personal dignity.

Business ethics is wider concept than corporate social responsibility.

Management of ethics depends upon seriousness of top level management about significance of business ethics.

Moral values of individuals influence business ethics.

Business ethics are supportive in effective implementation of various labour laws.

Organizational culture supporting high ethical standards has influence on ethical behaviour of managers.

Business ethics are based on moral values or principles like human welfare, service to community, good behaviour, fairness, honesty, sincerity etc.

Business ethics minimizes corruption and prevents fraud. Business ethics creates investor-friendly atmosphere.

4. Need of Business Ethics

In today’s competitive world, only a business following ethical practices can survive. Business ethics are essential due to numerous reasons which are as under:

ü To reduce corruption and malpractices those exist in the organisation and the society. ü To improve morale of employees and to reduce absenteeism and labour turnover rate.

ü To reduce social tensions created due to unethical practices of business firms. For example, scandal of Satyam Computer Services in India created problems of unemployment, job insecurity, increased suicide rate of employees, loss of investor faith, fear in the mind of various persons associated with Satyam Computer Services in one way or the other.

To create investor-friendly environment ü For business sustainability and growth
To stop various evils which the law cannot stop
For reconciling strategic corporate interests with moral demands ü For creation of a better society
To resolve those problems of business which government cannot resolve
To have a competitive edge in the market
For self-satisfaction and enhancing quality of lives

5. Scope of Business Ethics

Business ethics involves various moral duties of business. These are:

Moral duties towards society and government in general e.g. honestly paying taxes and other government dues, conservation of natural resources, protection of environment, prevention of artificial scarcity of goods, creation of job opportunities, other community welfare activities.

Moral duties towards various stakeholders in particular e.g. fair treatment to employees in compensation, evaluation and promotion, fair policy of recruitment and selection, humane approach towards employees, better quality goods at reasonable price, quick payment of loans and interest thereon, safe and eco-friendly distribution of products, capital appreciation, timely payment to suppliers, occupational safety, using fair competitive strategies etc.

Moral duties of various members or employees of organisation as individuals e.g. not to misuse others for personal benefits, not to use official facilities for personal use, not to take bribe, not to feel jealous of others’ success etc.

Thus, the scope of business ethics extends to various functional areas of management and society.

6. Various issues of business ethics

The non-fulfilment of moral duties can raise various issues. These issues can be classified as:

Social or Systemic Issues: These issues arise due to non fulfilment of economic, social or legal obligation.

Corporate Issues: These issues arise due to gap between stated policies and actual implementation. The ethical questions are raised about morality of policies, activities, practices or organisation structure of a particular organisation.

Individual Issues: These issues relate to question about morality of actions, decisions or character of an individual.

Many authors have categorised various areas of issues relating to business ethics. These are as under:

Issues relating to workplace
Issues relating to production
Issues relating to marketing
Issues relating to accounts and finance
Issues relating to environment
Issues relating to transparency and corporate governance
Corporate social responsiveness

7. Principles of Business Ethics

A number of thinkers like Cantt., J.S.Mill, Woodrad, Wilson, Thomas Garret etc. have developed various principles of business ethics. Some of these principles are discussed as under:

Sacredness of means and ends: This principle says that sacred and pure means should be used to achieve business goals.
Non co-operation in evils : As per this principle, the business should not support client or other business houses in their corrupt practices.
No jealousy : Business should not feel jealous of successful enterprises. It should try to learn their good policies and believe in healthy competition.
Equivalent price : It means providing worth of goods according to price charged.
Publicity : As per this principle, any good act of employee should be brought to the notice of others in the company.
Not to do any evil act: Business activities should not be carried out with the purpose of causing harm to others.
Rational thinking before doing: Business should make a rational judgment before doing anything. If any activity of business is profitable for it but not in the good interest of society, it should not be carried out.
Human dignity: Workers should not be treated as mere cog in the wheel. They have emotions and feelings. Their dignity should be maintained.

8. Importance of Business Ethics

An organisation can never succeed if it ignores ethics in its business practices. Ethics is key to success for all organisations. Business ethics has numerous benefits. Some of them have been discussed as follows:

Good Reputation: Good business reputation is built on a sound foundation of ethical culture. People believe that organisations which follow ethical practices and value people more than profit, continuously strive to operate with utmost integrity and honour.

Organizations perceived as ethical are truly respected by public even if they have no knowledge of its actual working. Ethical conduct helps in developing public confidence which is very essential for any organisation.

Better Decision Making: Ethical considerations in every type of organizational decision help in better decisions. The implications of such decisions are studied to ensure that interest of various groups is in harmony with generally accepted ethical norms. Industrial unrest and social tensions prevail when business decisions are taken without testing against ethical standards.

Growth of Business: Organisations with sound ethical base are able to sustain profits in the long run. Ethical principles may not ensure good results in short term but organizations are bound to reap benefits in the long run. Ethical conduct earns good public image which consequently contribute to organisation’s success and growth.

Better Employer-Employee Relations: Ethical behaviour of management is depicted when management cares for genuine interests of employees. Occupational safety and health, fair treatment to employees, no discrimination at workplace on the basis of sex, religion, disability etc. help in developing mutual faith between employees and management. Under ethical managerial approach, management tries to know how its employees think and react to particular situation and then it sets various work and personnel policies. In such work culture, a sense of oneness emerges between management and employees. Employees feel alignment between their values and values of the organisation.

Employee Growth: Ethical practices and conduct at workplace help employees face reality whether it is good or bad in the organisation and themselves. They feel confident that they can accept and deal with every type of situation. Ethics help employees in developing a rationale behind choosing a particular alternative or undertaking certain actions. This certainty and rationality help in reducing unnecessary tensions and burden of employees. They can concentrate more on their work and less on indecisive thoughts coming to their mind.

Avoidance of litigation costs: Management’s ethical approach ensures highly ethical policies and practices at workplace. It believes that incurring cost of mechanisms to ensure ethical business practices is far better than to incur heavy costs of litigation or lawsuits in case of breach of promises later on. Moreover, lawsuit against company hampers company’s image. Thus, well designed personnel policies, ensuring ethical treatment to employees in matters of hiring, disciplining, evaluating and firing, help in saving organisation from committing breach of contract of employment. The gap between said policies and actual practices has significant legal implications whether being related to finance, production, human resource and marketing. The due emphasis on ethical practices saves organisation from various penalties.

Enhanced Employee Commitment: Attention to ethics and values in the workplace create environment of openness, trust and care for each other. Employees feel strong alignment of their values with that of the values of the organisation. This results in increased employee motivation and commitment. Employees become ready to make individual sacrifices for the well being of the organisation. They work with great dedication.

Prevention of Fraud: Strong commitment to business ethics develops the culture of transparency and openness. Fraud prevention becomes a shared responsibility of all persons working in the organisation. Business ethics provides ability to assess possibility of frauds and to take measures to prevent such frauds.

Increased Organizational Competitiveness: Business ethics increases organisations’s competitiveness in marketplace. Such organisations can easily market their products. They find no problem in raising finance. Investors have faith in such organisations. They know that ethical conduct of organisation will contribute to effectiveness and profit earning capacity of organisation. Such organisations also have advantage of getting talented employees without much efforts.

Better service to society: Ethical practices of business contribute to the betterment of society more than one way. Timely payment of taxes increases government revenue and enables government to carry out welfare activities for society. Better image due to ethical practices lead to growth of organisation and as a result more job opportunities are created. Ethical conduct of business enterprises helps in creation of healthy society by controlling pollution or preserving natural resources. Business ethics plays a significant role in reducing various social tensions and social evils.

Other Benefits: Organisations, which have strict adherence to business ethics , achieve greater consistency in standards and quality of products, high profitability, success in diversity management, expanded market base, better image, long term liaison with clients and community support.

9. Unethical Business Practices

Any activity of an organisation which is undertaken for its own self interest and to cause harm to others is termed as ‘unethical business practice’. The organisation has to face legal complications and environment of distrust due to its unethical business practices. Activities which are considered as unethical business practices include:

Black marketing and hoarding
Selling substandard and defective goods at higher prices
Sexual harassment at workplace
Taking bribe for business deals
Manipulation of accounting records
Misleading financial analysis
Duplication and piracy i.e. infringement of patent, copyright and trademark
Misleading advertisements
Tax evasion and non-payment of compensation for unlawful act
Adopting unfair trade practices
Avoiding government regulations regarding production of hazardous products
Not implementation of various labour laws
Causing harm to environment by not following government prescribed norms.

10. Causes for unethical behaviour or unethical business practices

The growing rate of unethical business practices witnessed through various scams has become a big reason to worry. Various factors are responsible for this. Some of them are listed below:

i. Corruption at all levels and in all systems

ii. Liberalization, privatization and globalization

iii. Lack of stringent rules

iv. Falling inclination towards moral values

v. Ineffective regulatory bodies

vi. Highly competitive environment

vii. Greed for money

viii. Nuclear family culture

ix. Increasing complexities of modern life

x. Emergence of materialistic economy

xi. Lack of social security

xii. Weakening spiritual side of life

xiii. Frequently changing rules and laws making them more complex

11. Measures to prevent or control unethical business practices

The main responsibility of managing and developing ethical behaviour among employees lies with the top management. Top management can prevent unethical business practices in number of ways:

It should formulate corporate code of ethics to make employees aware of organisation’s expectations regarding ethical behaviour.

Ethical behaviour should be made an important parameter in performance evaluation of employees.

Some mechanism should be developed to bring unethical practices into light and to protect and reward whistleblowers.

To nip evil in the bud, compliance officers should be appointed. They will keep a check on corruption, fraud and abuse within the organisation. Moreover, proper vigilance will help in development of strong ethical environment in the organisation.

Seminars on importance of business ethics should be frequently organized for employees. Even comprehensive ethics training programme will be beneficial for employees.

Ethical conduct at all levels and in all departments should be promoted. Meetings may be called at short intervals to convey commitment of top management to business ethics and to keep people aware of benefits of business ethics.

Managers or leaders should consistently follow ethical standards. It will help in developing ethical work culture.

A system of self monitoring, transparency and accountability will be helpful in preventing unethical business practices.

12. Summary

Business ethics can be best understood in terms of three Cs i.e. Compliance, Contribution and Consequences. Business ethics are essential (i) to reduce corruption and malpractices those exist in the organisation and the society (ii) to improve morale of employees and to reduce absenteeism and labour turnover rate (iii) to reduce social tensions created due to unethical practices of business firms and (iv) to create investor-friendly environment. Business ethics involves various moral duties of business. These are (i) moral duties towards society and government in general e.g. honestly paying taxes and other government dues, conservation of natural resources etc. (ii) moral duties towards various stakeholders in particular e.g. fair treatment to employees in compensation, evaluation and promotion, humane approach towards employees, capital appreciation, better quality goods at reasonable price, using fair competitive strategies etc. (iii) moral duties of various members or employees of organisation as individuals e.g. not to misuse office facilities for personal purpose, not to take bribe, not to feel jealous of others’ success etc. The non-fulfilment of moral duties can raise various issues. These issues may relate to workplace, production, marketing, accounts and finance, environment, transparency and corporate governance and corporate social responsiveness. A number of thinkers have developed various principles of business ethics such as sacredness of means and ends, non co-operation in evils, no jealousy, publicity of good acts, not to do any evil act, rational thinking before doing and human dignity. Business ethics i.e. ethical standards and ethical conduct in business provide various benefits to the organisation like good reputation, better decision making, growth of business, better employer-employee relations, employee growth, avoidance of litigation costs, prevention of fraud, increased organizational competitiveness, better service to society etc. Many organisations still indulge in unethical business practices such as black marketing and hoarding, selling substandard and defective goods at higher prices, taking bribe for business deals, manipulation of accounting records, duplication and piracy, misleading advertisements, tax evasion etc. Certain strategies like formulation of corporate code of ethics, making ethical behaviour an important parameter in performance evaluation, appointment of compliance officer and seminars on business ethics can help in reducing unethical business practices.

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Few important sources to learn more about Business Ethics:

A.C. Fernando Business Ethics: An Indian Perspective Pearson Education India, 2009
C.Boyd, (1990) in G. Enderle, B.Almond, & A.Argandoña (Eds.) People in Corporations. Ethical Responsibilities and Corporate Effectiveness. Kluwer Academic Publishers, Dordrecht.
J. Donaldson, Key Issues in Business Ethics Academic Press, London, 1989.
J. Donaldson, ‘Multinational enterprises, employment relations and ethics’, Employee Relations, Vol. 23, No 6, p. 627-641, 2001
R. George De, Business Ethics Macmillan, New York,1986, 2nd Edition.
Ronald D Francis and Mukti Mishra Business Ethics: An Indian Perspective McGraw Hill Education (India) Ltd., 2009
http://www.ersj.eu/repec/ers/papers/03_12_p7.pdf