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Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

BUSINESS ETHICS

Lecture 1

AP. Azmi Ariffin MBA, CA (M), IIA

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ETHICS IS TOUGHER THAN YOU THINK . . .

A person with outward courage dares to die.

A person with inward courage dares to live.

- Lao Tzu

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CHAPTER 1 – The Nature of Morality

o Ethics & business ethicso Ethics deals with individual character and the moral

rules that govern and limit our conduct. It investigates questions of right and wrong, duty and obligation and moral responsibility.

o Business ethics is the study of what constitutes right and wrong (or good and bad) human conduct in a business context. Closely related moral questions arise in other organizational contexts.

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Moral vs nonmoral standards

o Moral standards concern behavior that is of serious consequence to human welfare, that can profoundly injure or benefit people.

o Moral standards take priority over other standards, including self-interest.

o The soundness of moral standards depends on the adequacy of the reasons that support/justify them – depends on the quality of the arguments/reasoning that supports them.

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Morality & etiquette

o Etiquette refers to the norms of correct conduct in polite society/more generally to any special code of social behavior/courtesy.

o Example of good etiquette – say “please” when requesting & “thank you” when receiving & to hold a door open for someone entering immediately behind you.

o Example of bad etiquette – to chew with your mouth open or to pick your nose when talking to someone.

o Violations of etiquette can have moral implications.o Example: the male boss who refers to female subordinates as

“honey” or “doll” shows bad manners. The female employees can raise moral issues concerning equal treatment and denial of dignity to human beings.

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Morality and law

o There are four kinds of law: statutes, regulations, common law & constitutional law.

o Statuteso Laws enacted by legislative bodies. Congress & state

legislatures enact statutes.o Example: The law that defines & prohibits theft is stature.o Administrative regulationso Legislatures often set up boards/agencies whose functions

include issuing detailed regulations of certain kinds of conduct.

o Example: state legislatures establish licensing boards to formulate regulations for the licensing of physicians & nurses.

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Morality and law

o Common lawo Laws applied in the English-speaking world when there were

few statutes.o Courts frequently wrote opinions explaining the bases of their

decisions in specific cases, including the legal principles they deemed appropriate.

o Each of these opinions became a precedent for later decisions in similar cases.

o Constitutional lawo Refers to court rulings on the requirements of the Constitution

& the constitutionality of legislation.o Although the courts cannot make laws, they have far-reaching

powers to rule on the constitutionality of laws & to declare them valid.

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o People sometimes confuse legality & morality – the legality of an action does not guarantee that it is morally right.

o An action can be illegal but morally righto An action that is legal can be morally wrongo It may have perfectly legal for the chairman of a

profitable company to lay off 125 workers & use three-quarters of the money saved to boost his pay & that of the company’s other top manager, but the morality of his doing so is open to debate.

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Professional codes

o Professional codes of ethics – the rules that are supposed to govern the conduct of members of a given profession.

o The members of a profession are understood to have agreed to abide by those rules as a condition of their engaging in that profession.

o Sometimes those codes are unwritten & are part of the common understanding of members of a profession.

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Where do moral standards come from?

o Our early upbringing, the behavior of those around us, the explicit & implicit standards of our culture, our own experiences & our critical reflections on those experiences.

o For philosophers, the important issues is not where our moral principles came from, but whether they can be justified.

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Religion & morality

o Religion involves not only a formal system of worship but also prescriptions for social relationships.

o Morality is not necessary based on religion – the issues is whether those beliefs can be justified.

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Ethical relativism

o The theory that what is right is determined by what a culture/society says is right.

o Example: abortion is condemned as immoral in Ireland but is practiced as a morally neutral form of birth control in Japan.

o Thus, for the ethical relativist there is no absolute ethical standard independent of cultural context, no criterion of right & wrong by which to judge other than that of particular societies.

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Ethical relativism (cont’d)

o Ethical disagreement does not imply that all opinions are equally correct. Moreover, ethical relativism has unsatisfactory implications:

1. It undermines any moral criticism of the practices of other societies as long as their actions conform to their own standards.

2. For the relativist there is no such thing as ethical progress. Although moralities may change, they cannot get better/worse.

3. It makes no sense from the relativist’s point of view for people

to criticize principles/practices accepted by their own society.

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Ethical relativism (cont’d)

o According to Albert Carr, a number of things that we normally think of as wrong are really permissible in a business context.

o Example: lying about one’s age on a resume, deceptive packaging, automobile companies’ neglect of car safety.

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Conscience

o People can & unfortunately sometimes do, go against their moral principles, but we would doubt that they sincerely held the principle in question if violating it did not bother their conscience.

o Example: When you were very young, you were probably told to tell the truth & to return something you filched to its proper owner.

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The limits of conscience:

1. When we are genuinely perplexed over what we ought to do, we are trying to figure out what our conscience ought to be saying to us

2. It may not always be good for us to follow our conscience – because they didn’t think through the implications of what they were doing or perhaps because they failed to internalize strongly enough the appropriate moral principles & a person’s conscience might disturb the person about something that is perfectly all right.

o  

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Moral principles & self-interest

o Example: imagine that you are in your car hurrying home along a quiet road, trying hard to get there in time to see the kickoff of an important football game. You pass an acquaintance who is having car trouble. He doesn’t recognize you. As a dedicated fan, you would much prefer to keep on going than to stop & help him, thus missing at least part of the game. You might rationalize that someone else will eventually come along & help him if you don’t, but deep down you know that you really ought to stop. On the other hand, self interest seems to say, “Keep going”.

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Moral principles & self-interest (Cont’d)

o Should you follow your self-interest or your moral principles?

o From the moral point of view, you should follow your moral principles.

o But from the selfish point of view, you should look out solely for “number one”.

o Your choice will depend on your character, on the kind of person you are, which depends in part on how you were raised.

o Individuals who care only about their own happiness will generally be less happy than those who care about others.

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Individual integrity & responsibilityOrganizational norms

o Major characteristics of organization is the shared acceptance of organizational rules by its members.

o Group cohesiveness requires that individual members commit themselves – relinquish some of their personal freedom in order to further organizational goals.

o According to recent survey by the American Management Association, pressure to meet unrealistic business objectives & deadlines is the leading cause of unethical business conduct

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Conformity

o Organizations exert pressure on their members to conform to norms & goals.

o Sometimes, some people didn’t want to seem different, even though they continued to believe their judgments were correct, the majority couldn’t be wrong.

o Groupthink happens when pressure for unanimity within a highly cohesive group overwhelms its members’ desire/ability to appraise the situation realistically & consider alternative courses of action.

o Members of the group close their eyes to negative information, ignore warnings that the group may be mistaken & discount outside ideas that might contradict the thinking or the decisions of the group.

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Diffusion of responsibility

oDiffusion of responsibility inside an organization can weaken people’s sense of moral responsibility.

o They tend to see themselves simply as small players in a process

oNo control and are unaccountableo I’m just doing my job

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o Defensible moral judgmentso Moral judgments should be supported by moral

standards & relevant facts.o Patterns of defense & challenge:

1. Evaluating the factual claims

2. Challenging the moral standard

3. Defending the moral standard

4. Revising & modifying the argument

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Requirements for moral judgments:

o Should be logicalo Able to support our moral judgments with reasons & evidence

rather than basing them solely on emotion, sentiment or social or personal preference.

o Our moral judgments should be logically compatible with our other moral & nonmoral beliefs – avoid inconsistency.

o Should be based on factso Information should actually relate to the judgment, should be

complete or inclusive of all significant data, accurate or true.o Should be based on acceptable moral principles

o Reliable moral judgments must be based on sound moral principles – principles that are unambiguous & can withstand critical scrutiny & rational criticism.

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BUSINESS ETHICS IS A PROCESS OF RESPONSIBLE DECISION-MAKING

The scandals and ruin experienced since the Enron collapse were brought about by ethical failures.

We will discuss a decision-making model that can help individuals to understand such failures and avoid future business and personal tragedies.

Why explore ethics in business?

Because

Ethics Failures = Business Failures

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AN ETHICAL CORPORATE CLIMATE . . .

“…is either developing or deteriorating, enriching itself or impoverishing itself. It needs constant care and attention.”

Study by the Woodstock CenterGeorgetown University, D.C.

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AN ETHICAL CORPORATE CLIMATE…

“…the hottest places in hell are reserved for those who, in a period of moral crisis, maintain their neutrality.”

- Dante

“In morality, as in literature – or in any field of human creativity – indifference is the enemy; indifference to evil is worse than evil.”

- Elie Wiesel, Nobel Peace Prize Laureate

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WHY IS ETHICS IMPORTANT IN THE BUSINESS ENVIRONMENT?

Consider the range of people who were harmed by the collapse

of Enron.

Stockholders lost over $1 billion in stock value.

Thousands of employees lost their jobs, their retirement

funds, and their health care benefits.

Consumers in California suffered from energy shortages

and blackouts that were caused by Enron’s manipulation

of the market.

Hundreds of businesses that worked with Enron as

suppliers suffered economic loss with the loss of a large

client.

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WHY IS ETHICS IMPORTANT IN THE BUSINESS ENVIRONMENT?

Enron’s accounting firm, Arthur Andersen, went out of business as a direct result.

The wider Houston community was also hurt by the loss of a major employer and community benefactor.

Families of employees, investors, suppliers were also hurt.

Many of the individuals directly involved will themselves suffer criminal and civil punishment, including prison sentences for some.

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The consequences of unethical behavior and unethical business institutions are too serious for too many people to be ignored.

Multiply the harms by the dozens of other companies implicated in similar scandals and one gets an idea of why ethics is no longer dismissed as irrelevant.

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“STAKEHOLDERS”

The decisions made within a business firm will affect many more people than only an individual.

Ethically responsible business decision-making must move beyond a narrow concern with stockholders, and consider the impact that decisions will have on a wide range of stakeholders.

A business stakeholder will be anyone who affects or is affected by decisions made within the firm.

Failure to consider these additional stakeholders will have a detrimental impact on those stakeholders, stockholders, and on the firm’s long-term sustainability.

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WHY CARE ABOUT ETHICS?

Unethical behavior creates financial and marketing risks. A company can go out of business, and its employees can go to jail,

if no one is paying attention to the ethical standards of the firm. A firm’s ethical reputation can provide a competitive advantage, or

disadvantage. Consumer boycotts give even the most skeptical business leader

reason to pay attention to ethics. Managing ethically can also pay significant dividends in

organizational structure and efficiency. Trust, loyalty, commitment, creativity, and initiative are just some of

the organizational benefits that are more likely to flourish within ethically stable and credible organizations.

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REALITY CHECK

Why be good?The Institute for Business, Technology and Ethics suggests the following “Nine Good Reasons” to run a business ethically:

1. Litigation/indictment avoidance2. Regulatory freedom3. Public acceptance4. Investor confidence5. Supplier/partner trust6. Customer loyalty7. Employee performance8. Personal pride9. It’s right

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DOES “RIGHT” OR “INTEGRITY” HAVE REWARDS?

“While the headlines are going to all the guys who are doing it wrong, there is a very strong corps of people who are really committed to doing it right. Part of doing it right is you're not doing it to get headlines. You're doing it to really make a difference in the lives of people.”

-- Georgetown College President Bill Crouch, speaking at a business ethics conference sponsored by the Ethical Leadership Institute. ("Strong Ethics Help Businesses Succeed, Conference Speakers Say," AP, Mar. 25)

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BUSINESS ETHICS AS ETHICAL DECISION-MAKING

Decisions which follow from a process of thoughtful and conscientious reasoning will be more responsible and ethical decisions.

Responsible decision-making and deliberation will result in more responsible behavior.

What is the point of a business ethics course? Ethics refers not only to an academic discipline, but to

that arena of human life studied by this academic discipline, namely, how human beings should properly live their lives.

An ethics course will not change your capacity to think, but it could stimulate your choices of what to think about.

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BUSINESS ETHICS AS ETHICAL DECISION-MAKING

An ethics class strives to produce more ethical behavior among the students who enroll. But the only academically and ethically legitimate way to do this is through careful and reasoned decision-making.

A process of rational decision-making, a process that involves careful thought and deliberation, can and will result in behavior that is both more reasonable and more ethical.

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SO, WHAT DO WE MEAN BY“ETHICS?”

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ETHICS IS NOT THIS:

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WHAT IS “ETHICS?”

At its most basic level, ethics is concerned with how we act and how we live our lives.

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WHAT IS “ETHICS?”

Ethics involves what is perhaps the most monumental question any human being can ask:

Ethics is, in this sense, practical, having to do with how we act, choose, behave, do things.

Philosophers often emphasize that ethics is normative, in that it deals with our reasoning about how we should act.

How should we live?

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WHAT IS “ETHICS?”

This fundamental question of ethics can be interpreted in two ways.

"We" can mean each one of us individually, or it might mean all of us collectively.

In the first sense, this is a question about how I should live my life, how I should act, what I should do, what kind of person I should be.

This meaning of ethics is sometimes referred to as morality, and it is the aspect of ethics that we refer to by the phrase “personal integrity.”

How should we live?

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PERSONAL RESPONSIBILITY VS. SOCIAL RESPONSIBILITY?

There will be many times within a business setting where an individual will need to step back and ask:

Social ethics raises questions of justice, public policy, law, civic virtues, organizational structure, and political philosophy.

In the second sense, “How should we live?” refers to how we live together in a community.

Business ethics is concerned with how business institutions ought to be structured, about corporate social responsibility, and about making decisions that will impact many people other than the individual decision-maker.

What should I do? How should I act?

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PERSONAL RESPONSIBILITY VS. SOCIAL RESPONSIBILITY?

This aspect of business ethics asks us to examine business institutions from a social rather than an individual perspective.

We refer to this broader social aspect of ethics as decision-making for social responsibility.

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ETHICAL NORMS AND VALUES

A company’s core values, for example, are those beliefs and principles that provide the ultimate guide in its decision-making.

Individuals can have their own personal values and, importantly, institutions also have values.

Values =

Those beliefs that incline us to act or to choose in one way rather than another.

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DISTINGUISHING VALUES

One way to distinguish various types of values is in terms of the ends that they serve. Financial values serve monetary ends, religious values

serve spiritual ends, aesthetic values serve the end of beauty, legal values serve law, order, and justice, and so forth.

Different types of values are distinguished by the various ends served by those acts and choices.

So, how are ethical values to be distinguished from these other types of values? What ends are served by ethics? Ethical values are those beliefs and principles that

impartially promote human well-being.

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LEGAL RESPONSIBILITIES VS. ETHICAL RESPONSIBILITIES

The law provides a very important guide to ethical decision-making, but legal norms and ethical norms are not identical nor do they always agree.

Over the last decade, many corporations have established ethics programs and hired ethics officers who are charged with managing corporate ethics programs.

Much good work gets done by ethics officers, but it is fair to say that much of this focuses on compliance issues. The Sarbanes-Oxley Act created a dramatic and vast new layer of legal compliance issues.

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CAN’T THE LAW ANSWER THE QUESTION OF RIGHT OR WRONG?

What’s good about this approach? What’s challenging (negative) about this approach?

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WHY LEGAL COMPLIANCE IS INSUFFICIENT?

Holding that obedience to the law is sufficient to fulfill one’s ethical duties begs the question of whether the law, itself, is ethical.

Societies that value individual freedom will be reluctant to legally require more than just an ethical minimum.

On a practical level, telling business that its ethical responsibilities end with obedience to the law is just inviting more legal regulation.

The law cannot possibly anticipate every new dilemma that businesses might face; so, often, there may not be a regulation for the particular dilemma that confronts a business leader.

The perspective that compliance is enough relies on a misleading understanding of law.

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REALITY CHECKETHICS GOES MAINSTREAM!

A 2003 poll by Deloitte of 5,000 directors of the top 4,000 publicly traded companies reported that 98 percent believed that an ethics and compliance program was an essential part of corporate governance.

Over 80 percent had developed formal codes of ethics beyond those required by Sarbanes-Oxley, and over 90 percent included statements concerning the company’s obligations to employees, shareholders, suppliers, customers, and the community at large in their corporate code of ethics.

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HOW IS ETHICAL DECISION-MAKING DIFFERENT FROM OTHER DECISION-MAKING?

Ethics is practical and normative Ethics is therefore a vital element of practical

reasoning: reasoning about what we should do, and is distinguished from theoretical reasoning, which is reasoning about what we should believe.

Theoretical reason is the pursuit of truth, which is the highest standard for what we should believe.

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PHILOSOPHICAL ETHICS AND THEORIES

Is there a comparable methodology or procedure for deciding what we should do and how we should act?

There are guidelines that can provide direction and criteria for decisions that are more or less reasonable and responsible: philosophical ethics.

Ethical theories are patterns of thinking, or methodologies, to help us decide what to do.

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End of Lecture 1