BUSINESS ETHICS

Overview
What is ethics?
Ethics is the branch of philosophy that focuses
on morality and the way in which moral
principles are applied to everyday life. Ethics
has to do with fundamental questions such as
What is fair? What is just? What is the right
thing to do in this situation? Ethics involves an
active process of applying values, which may
range from religious principles to customs and
traditions.
 The meaning of ethics
Ethics
A conception of right and wrong conduct. It tells us
whether our behavior is moral or immoral with
fundamental human relationships.

Ethical Principles
Guides to moral behavior.

Business Ethics
The application of general ethical ideas to business
behavior.
 Figure 5.2
Why should business be ethical?

To meet demands of business stakeholders.

To enhance business performance.

To comply with legal requirements.

To prevent or minimize harm.

To promote personal morality.

What is business ethics?
Business ethics focuses on what constitutes
right or wrong behavior in the world of business.
Corporate business executives have a
responsibility to their shareholders and
employees to make decisions that will help their
business make a profit. But in doing so,
businesspeople also have a responsibility to the
public and themselves to maintain ethical
principles.
 Although ethics provides moral guidelines, individuals
must apply these guidelines in making decisions.
Ethics that applies to business (business ethics) is not a
separate theory of ethics; rather, it is an application of
ethics to business situations. Although all people have
ethical responsibilities, higher ethical standards are
imposed upon professionals who serve as social
models, such as physicians, attorneys, and
businesspeople.
The Relationship Between Law
and Ethics
The law is an expression of the ethical beliefs of our
society.
Law and ethics are not the same thing. The question,
Is an act legal? is different from the question, Is an
act ethical? The law cannot codify all ethical
requirements. Therefore, an action might be unethical,
yet not necessarily illegal. For example, it might be
unethical to lie to your family, but it is not necessary
illegal.
 Similarly, just because an act is illegal does not
necessarily mean it is immoral. Rosa Parks was acting
illegally when she refused to give up her seat on the
bus to a white male, but that does not necessarily mean
she was acting unethically. Should an individual obey
the law even if it would be unethical to do so? Under
the theory of civil disobedience espoused by Martin
Luther King, Mahatma Ghandi and others, an immoral
law deserves to be disobeyed. Can you think of any
examples of acts that would be illegal, yet arguably
ethical?
THEORIES OF ETHICAL CONDUCT
Theories of ethics present standards by which a
person can analyze and evaluate his or her own
moral conduct.
Over the centuries, two different philosophical
frameworks developed: ethical standards based
on universal duties (deontology) and ethical
standards based on consequences (teleology ,
i.e. utilitarianism).
Deontology
Deontology is the philosophical practice of
defining and adhering to an absolute set of
standards by which ethical behavior can be
measured. It tries to define universal duties that
serve as moral guides to decision making.
When a moral dilemma arises, a person can
apply these universal standards to determine a
course of action that is good.
Deontology 2
In deontology, a person fulfills absolute moral
duties regardless of whether good comes from
the actions. A person decides upon actions by
asking if a particular action is morally right or
wrong. The act of carrying out that duty is
important rather than the consequences of the
act. An example of a set of deontological rules
would be the Ten Commandments.
The Rights Model
The rights model analyzes ethical issues by
focusing on an actions impact on human rights.
Under this model, human rights are the rights all
people have. An action that maximizes respect
for human rights and minimizes their violation is
morally correct. When encountering ethical
dilemmas, a person applying the rights model
selects the action that minimizes the violation of
stakeholders rights.
BASIC CATEGORIES OF HUMAN RIGHTS
The two necessities to be fully human are
freedom and well-being. Thus, two basic
categories of human rights exist within the
model: (1) rights of liberty, and (2) rights of well-
being.
Rights of Liberty
Privacy
Free consent
Free speech
Freedom of conscience
Right to life
Rights of Well-Being
Employment
Food
Housing
Education
RIGHTS AND HUMAN VALUE
Under the rights model, each person possesses
certain fundamental human rights because of the
fact that they are a human being. Each persons
life has an infinite value.
TELEOLOGY: Utilitarianism
(Consequentialism)
Utilitarianism is an approach to establishing
ethical standards based on the consequences of
an action. In an ethical dilemma, a person
selects the action that brings about the greatest
amount of good for the greatest number of
people. The model determines correctness in
terms of social benefit. Many business people
favor the cost/benefit approach of utilitarianism.
Applying the Rights Model
Identify the facts.
Identify the ethical issues.
Identify the alternative courses of action.
Identify the stakeholders.
Determine to which extent each alternative respects the
dignity and fundamental rights of stakeholders or
violates their rights.
Choose the alternative that maximizes the dignity of
stakeholders and minimizes the violation of their rights.
Applying Utilitarianism
Identify the facts.
Identify the ethical issues.
Identify the alternative courses of action.
Identify the stakeholders.
For each alternative, calculate the costs and benefits
(identify who would be harmed and who would benefit).
Choose that alternative which results in the greatest
amount of good for the greatest number of
stakeholders.
Example #1
A secretary who has worked for your corporation
for fifteen years is involved in a car accident in
which she permanently loses the use of her right
hand. Thus, she can no longer effectively type,
file, or perform many of the other functions that
she previously had performed and that are
included in her job description.
 Your corporation has a very tight budget and
does not have sufficient funds to pay for an
additional secretary without reallocating budget
items. The injured secretary has been very loyal
to your corporation, and you have been very
satisfied with her work and dedication. She
wants to stay at her job.
 Moreover, she does not believe that she could
find other employment at this time. Should your
corporation fire her, lay her off with
compensation, or find a way to retain her? In
resolving this dilemma, apply:
Utilitarianism
The Rights Model
Your own personal opinion
EXAMPLE # 2 CAPITAL PUNISHMENT
Apart from the United States, few countries use the
death penalty.
Only China and Iran execute more people than the U.S.
No member of the European Union uses it. Under the
European convention for the Protection of Human
Rights and Fundamental Freedoms, it is regarded as a
human rights violation, so no nation can be admitted to
the European Union if it still has the death penalty on its
books.
 When President Bush was elected president, the
federal government had not used the death
penalty for 38 years. He reinstated it.
When he was governor of Texas, that state had
more executions than any other, and Bush
signed 152 death warrants more than any
previous governor of Texas, or any other
American governor in modern times.
 Typically, he made his life-and-death decision
after a half-hour briefing with his legal counsel.
Only once, as governor of Texas, did he stop an
execution.
 Is it inconsistent to oppose the killing of embryos
or fetuses, yet support the death penalty?
Not necessarily. Bush has said: Some
advocates of life will challenge why I oppose
abortion yet support the death penalty. To me,
its the difference between innocence and guilt.
 But to hold the two positions consistently, one
would at least need to be very careful about
supporting the death penalty. Since humans are
fallible, any legal system that puts large numbers
of people to death will risk executing people
innocent of the crimes for which they were
charged.
 Several studies list people who have been
condemned to death, and in some cases
executed, who were later shown to be innocent.
The Death Penalty Information Center has a list
of 102 people wrongfully sentenced to death in
the U.S. between 1973 and 2000.
 An investigation by the Chicago Tribune of all
682 executions in the U.S. between 1976 and
2000 found that at least 120 people were put to
death while still proclaiming their innocence, and
in 4 of those cases there was evidence
supporting their claim of innocence.
 When Florida Supreme Court Justice Gerald
Kogan retired, he said that there were several
cases in which he had grave doubts about the
guilt of people executed in Florida.
 President Bushs attitude about the risk of putting to
death innocent people is in sharp contrast to another
Republican governor who was once a supporter of the
death penalty.
In 1999, Gov. George Ryan of Illinois became
concerned about the risk of putting innocent people to
death when an investigation by a journalism class at
Northwestern University proved that another man
committed a murder for which Anthony Porter, a death-
row inmate for 16 years, was about to be executed.
 Ryan set up a commission that, over 3 years,
concluded that 13 condemned prisoners were
innocent.
Ryan stated, Our capital system is haunted by
the demon of error, error in determining guilt and
error in determining who among the guilty should
die.
 Just before he left office, Ryan felt that he could
no longer live with the risk of executing the
innocent: he commuted all death sentences in
Illinois to terms of imprisonment.
 No matter how careful Bush may have been
after all, he did spend 30 minutes reviewing each
case before he signed the death warrant it
remains possible, if not probable, that at least
one of the people executed during his tenure
was innocent.
 Bush has said: I support the death penalty
because I believe, if administered swiftly and
justly, capital punishment is a deterrent against
future violence and will save other innocent
lives.
 In the third of his debates with Al Gore,
moderator Jim Lehrer asked Bush whether he
thought that the death penalty actually deters
crime. Bush said, I do thats the only reason
to be for it. Let me finish that I dont think you
should support the death penalty to seek
revenge. I dont think thats right. I think the
reason to support the death penalty is because it
saves other peoples lives.
 The problem with this defense of capital
punishment is that almost all of the evidence is
against it. Since it is easy to compare murder
rates before and after the abolition or
reinstitution of the death penalty, or in different
jurisdictions that do or do not have the death
penalty, there is plenty of relevant data.
 For example, after the 1976 USSC ruling that the
death penalty is constitutional, a dozen states
chose not to enact laws allowing it. These states
have not had higher homicide rates than the
states that did enact a law. In fact, 10 of them
have had homicide rates lower than the national
average.
 South Dakota has it, North Dakota does not. The
homicide rate is higher in South Dakota.
Connecticut has it, Massachusetts does not. Again, the
homicide rate is higher in the state that has the death
penalty.
Homicide rates have risen and fallen in roughly
symmetrical patterns in states with and without the
death penalty, indicating that the death penalty has little
effect on the incidence of homicide.
Executing the Mentally Retarded
A person who is seriously mentally retarded is likely to
be incapable of understanding right from wrong, and
thus is morally innocent, even if he or she did commit
the crime.
As a national consensus against executing the mentally
retarded began to build, Bush, as governor of Texas,
came out against a bill prohibiting the use of the death
penalty against profoundly mentally retarded criminals
(with IQs of less than 65). His explanation: I like the
law the way it is.
 Even in Texas, a poll in 1998 showed that 73%
of all Texans were opposed to executing the
mentally retarded.
In May 1997, Bush denied an appeal for
clemency on behalf of Terry Washington, a
thirty-three-year-old mentally retarded man with
the communication skills of a 7-year-old.
Washington was executed.
 In June 2002, the USSC ruled that, given the
growing national consensus, executing retarded
persons is cruel and unusual punishment and
hence a violation of the 8th Amendment.
U.S. Corporate Sentencing Guidelines: Directives
1. Establish standards and procedures to reduce criminal conduct.
2. Assign high-level officer(s) responsibility for compliance.
3. Not assign discretionary authority to risky individuals.
4. Effectively communicate standards and procedures through
training.
5. Take reasonable steps to ensure compliancemonitor and audit
systems, maintain and publicize reporting systems.
6. Enforce standards and procedures through disciplinary
mechanisms.
7. Following detection of offense, respond appropriately and prevent
reoccurrence.
 Sarbanes-Oxley Act of 2002
The firms audit committee is entrusted with auditor
oversight with all independent directors on the
committee.
Certain nonaudit services by auditors to clients are
banned, nonaudit services must be preapproved by the
audit committee, the lead auditor must be rotated every
five years, and auditors report to the audit committee.
The CEO and CFO must sign off on financial
statements as accurate and fair and must repay
bonuses if a restatement of financials is undertaken.
Sarbanes-Oxley Act of 2002
A Public Company Accounting Oversight Board is established.
The firms are not permitted to offer loans to its executive officers
or board of directors.
SEC rules will create guidelines for internal controls and financial
reporting procedures, require the adoption of or waiver for a code
of ethics for the board, mandate a financial expert must serve on
the board, and compel the firm to state its financial condition in
plain English on a rapid or current basis.
ERISA penalties are increased from $5,000 to $100,000 and one
year in prison to $100,000 to $500,000 and up to 10 years in
prison.
 Figure 5.3
Why ethical problems occur in business

Reason Nature of Ethical Typical Approach Attitude

Problem

Personal gain and Selfish interest Egotistical mentality I want it!

selfish interest versus others
interests

Competitive Firms interest Bottom-line We have to beat the

pressures on profits versus others mentality others at all costs!
interests

Business goals Bosss interests Authoritarian Do as I say, or

versus personal versus subordinates mentality else!
values values

Cross-cultural Companys interests Ethnocentric Foreigners have a

contradictions versus diverse mentality funny notion of
cultural traditions whats right and
and values wrong.
 Exhibit 5.C

Anticorruption and bribery efforts in Russia

President Putins commitment to end bribery and
corruption is demonstrated by the following actions:
A probe of high-level bureaucrats led to charges against many officials including
Railways Minister Nikolai Aksyonenko for illegally spending ministry funds.
Judges salaries were increased fivefold in an effort to cut down on courtroom bribery.
A new law banned the intervention of state prosecutors in private litigation between
contending business parties, eliminating another potential bribery situation.
Other regulations sharply restricted discounts that railroad regulators could give to
shippers.
The number of business activities that required a license was drastically reduced from
2,000 to 100fewer licenses meant fewer chances for a bureaucrat to be in line for a
bribe.

Source: Cleanup Time: The Kremlin is Launching a Major Attack

on Corruption, Business Week, January 14, 2002, pp.46-47
 Figure 5.4

International codes of conduct and their focus

Ethical Focus ICC OECD ILO UN/CTC EU UN/GC
Economic X X X X X
development
Technology X X X X X X
transfer
Regulatory action X X X X X
Employment X X X X X
Human rights X X X X
Environmental X X X
protection
Consumer X X
protection
Political action X X
Source: William C. Frederick, The Moral Authority of Transnational Corporate Codes, Journal of Business Ethics 10 (1991), pp. 165-
177; and Kathleen A. Getz, International Codes of Conduct: An Analysis of Ethical Reasoning, Journal of Business Ethics 9(1990), pp.
567-577.